What was the hottest topic in 2021? Cryptocurrency, or digital currency, with various myths of getting rich quickly emerging one after another. Many friends who are not familiar with digital currency also want to create their own wealth myths! So how to buy coins? What should be noted before investing in cryptocurrency?
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For newcomers, it is really difficult. We do not understand the value of digital currency, but we must understand the rules of the game for entering the market to buy coins! So, what should newcomers pay attention to when entering the market to buy coins? If you have just started paying attention to cryptocurrency and want to know whether to invest, here are 10 things you need to know before making a purchase. Even if you are an experienced cryptocurrency investor, if you encounter newcomers preparing to enter the market, please share this article with him/her. Let's take a detailed look at the essential things to know before diving into cryptocurrency with the editor of Biyi!
- Do not invest more than you can afford to lose
Cryptocurrency is riskier than many other investments. Aside from volatility, nothing is guaranteed. More importantly, it is largely unregulated in most cases. There is no insurance from the Federal Deposit Insurance Corporation, nor is there a last buyer. The price of cryptocurrency is constantly fluctuating wildly. While the market is basking in the glory of a bull market, it has undergone painful and prolonged corrections, and it is almost certain that there will be more.
The level of risk varies. Bitcoin, the original cryptocurrency, has been around for over a decade and is much less likely to disappear than most other tokens. But it is not without risk.
Therefore, do not stake your property or life savings on any token.
- Do thorough research
Before you invest a significant amount of money in any digital currency, spend hours researching the technology to understand its value proposition and risks. (“Surely someone will take over” is not a value proposition.)
Read everything you can find on the subject. Lurk in community forums and developer mailing lists, listen to podcasts. Borrow books from the library, not just about digital currency, but also about cryptography, game theory, and economics.
If the pandemic situation in your area has improved, attend local offline meetups. Ask questions boldly, and if you don’t understand what you hear, don’t hesitate to ask others for clarification. If you still don’t understand, don’t think it’s your fault; people may just not be explaining it clearly enough. Sincere people will take the time to help you, but even so, be wary of people urging you to buy a particular token.
Even if you are convinced, seek out some opposing viewpoints and listen to their arguments. Remember the famous quote by John Stuart Mill: “He who knows only his own side of the case knows little of that.”
Once you think you have researched everything you need to know, continue to dig deeper; things are not that simple.
- Resist the “fear of missing out (FOMO)” emotion
If the only reason you are investing is to avoid missing out, you will definitely end up losing everything.
The fear of missing out (FOMO) can destroy the wealth you have accumulated over the years. The problem is that it is an instinctive reaction, so we need to prepare for research in advance. Trades based on your intuition will mostly lead to regret.
Understand the asset you are purchasing. Seeing a currency appreciate by about 30% in the past 24 hours on a trading app is not something worth researching. Don’t mindlessly chase after unknown coins that have surged.
Every coin has its promoters, even Bitcoin. Don’t succumb to peer pressure and choose blind faith; this is not high school. Think independently and assess the merits of the investment.
Research, research, and research again!
- If it sounds too good to be true, it probably is
Like Wall Street, the U.S. Congress, or the American Bar Association, the cryptocurrency space is rife with charlatans. There are enough people promising that their projects will surpass Bitcoin. But is that really the case? There’s only one way to find out: investigate.
Be cautious when buying! Be careful with lending leverage! Some cryptocurrency exchanges offer leverage of over 100 times, meaning you can borrow up to 99% of your investment cost. If the token skyrockets, your profits will increase, but if it crashes, you will quickly face liquidation.
- Don’t take things at face value; verify!
There are plenty of scammers in this market. Just last weekend, some rogues on Twitter took advantage of Elon Musk's appearance on the TV show "Saturday Night Live" to scam people out of various cryptocurrencies worth $100,000 with fake "giveaways." These criminals impersonated the Twitter account of the comedy show, instructing victims to send a small amount of cryptocurrency to verify their address. If they did, they would receive ten times the return.
This unbelievable luck is a dangerous signal to be vigilant!
- Beware of “unit bias”
A token priced at $1 does not mean it is cheaper than Bitcoin, which is valued at $58,000.
There are thousands of cryptocurrencies on the market, some mimicking Bitcoin, while others attempt to solve different problems, all with varying degrees of developer community support and decentralization. The value of a token depends on how it was created and its significance; what is its utility? Who is researching it? How large is the developer community? How active is the codebase? Are updates to the open-source software recorded and synchronized on GitHub? Projects are like buildings; the codebase needs maintenance; otherwise, it will become structurally unsound.
Most importantly, what is the security model of the token? PoW, PoS, or another mechanism? If it’s PoW, how is the network’s computing power? If you don’t know what these mean, you are not ready!
- Without owning the private key, you do not have true ownership of the token
Cryptocurrency is an anonymous asset similar to cash or jewelry, meaning the holder is considered the legitimate owner. Once it is lost or stolen, it is gone.
This is why advanced users advise against entrusting the password keys of your digital currency wallet to third parties, like exchanges, as these companies are largely unregulated in many places and may be subject to hacking or run away with funds. Over the past 10 months, DeFi platforms have been heavily attacked, and centralized platforms like Binance have faced similar issues.
However, storing your private keys on a hardware wallet or paper wallet can also be a headache, which is why experienced investors prefer to use third-party custody.
Many issues in the cryptocurrency industry are trade-offs. Do you trust yourself not to lose your private key or mnemonic phrase? If not, you have to rely on others for custody, and history has given you many reasons not to do so.
To reduce risk, there are multi-signature wallets that can be configured to require n individuals to participate in signing to access the funds in the wallet, but this is relatively complex for newcomers.
In addition to being attacked, exchanges may also be unable to process withdrawals at any time for reasons such as solvency issues or related legal disputes. Some exchanges may even lack sufficient infrastructure to maintain normal system operations, as seen with Coinbase and Robinhood frequently experiencing outages during market volatility. If you do not hold the tokens yourself, you cannot guarantee control over your tokens.
That said, there may be many reasons you want to use an exchange, so it is important to check the user agreement and ensure you are protected against various possibilities.
- You can buy fractional amounts of Bitcoin (and other tokens)
Tokens can be purchased in fractional amounts; for example, Bitcoin can be subdivided to eight decimal places. So if you are interested in a particular token, you can try buying $10 and play around with it.
Billionaire Mark Cuban recently mentioned on television that buying a small amount of Dogecoin is “much better than buying a lottery ticket.” Unfortunately, he also encouraged viewers to use Dogecoin to buy goods without mentioning the tax implications.
- Understand the tax consequences
This is especially important in the United States for several reasons. First, the IRS considers cryptocurrency to be property, not currency, so taxes are required. As a result, if you buy a coin for $1, and its value doubles, and you spend that extra $1 on a pack of gum, you need to report that capital gain and pay taxes. Despite efforts by the cryptocurrency industry to lobby, there is no "minimum exemption."
Additionally, centralized exchanges regularly send account information to the IRS. Of course, cryptocurrencies are not regulated like stocks or banks. However, the federal government is running a massive deficit and will not hesitate to send someone to visit you to inquire about your cryptocurrency transactions.
- Use dollar amounts to calculate average costs, and don’t get hung up on prices
Go out for leisure, breathe fresh air, exercise, enjoy the sunshine, and spend more time with family. On this basis, invest in cryptocurrency.
The market is constantly fluctuating, and we should have a long-term investment mindset. If you want the dopamine rush, go for a run or watch an action movie.
What is the best investment method? It is to use dollar-cost averaging (DCA). Purchase a certain amount of any cryptocurrency you like at regular intervals, and then don’t look at it. If you have a long-term perspective and use DCA, you won’t be forced to sell or increase your position due to short-term fluctuations.
The purpose of this article is not to scare anyone away from this fascinating and potentially transformative industry, but to ensure they enter the market with a cautious and vigilant mindset.
Investing cautiously is always a good idea!
The above are the precautions that the editor of Biyi shared regarding what to pay attention to before buying digital currency. Finally, I must advise everyone to be cautious when entering the market! Rational investment is key!