With the value of cryptocurrencies skyrocketing into the $100 billion range, it’s easy to get infected by the biggest “digital gold rush” since the dot com bubble. But while everyone with half a brain and a smartphone seems to make tons of money, it may be time to remind ourselves that it’s just as easy to lose everything on a bad investment.
Here are some of the things you should avoid:
You might get hacked and lose all your Bitcoin
The most common way to get hacked is through phishing links. You might receive emails or private messages on Twitter, Telegram, or Slack asking you to “urgently update your account” or to log in through Coinbase or your email account to “claim a prize.”
Equipped with your details, the attacker will try to log into all popular cryptocurrency exchanges or wallets that you might use or might use your email to reset the passwords on your accounts.
Other forms of hacking resemble social engineering, tricking you into sending money to the wrong wallet, or helping out a “friend in need.”
Here’s how to stay safe:
- Keep your computer up to date
- Be careful with the software you download, especially Bitcoin wallets
- Get yourself a password manager
- Enable two-factor Authentication on all your accounts
- Learn about social engineering techniques
- Keep your Bitcoins securely in cold storage
If you forget your backup seed you could lose all your Bitcoin
By far the most common way to lose Bitcoins is not due to hacking. Instead, it’s far more common for people to set up a wallet, buy some Bitcoin or accept it as payment, and then later lose access to it—either because their phone broke, was lost or stolen, or it simply got reset to its factory settings.
Every Bitcoin wallet worth using, on both Android and iPhone, gives you the option of backing up your wallet with a 12 or 13-word backup phrase. If you haven’t written down this backup phrase already, do it now! Go into your app, look at your phrase and write it down on a piece of paper. Don’t copy and paste it anywhere, and don’t put it in any online account or cloud storage service—put it on paper to protect it from hacking.
You could trade away all your Bitcoin
With all the ups and downs and sharp swings in the cryptocurrency markets, they may seem like a gold mine for traders. But just like with gold mines, only a few people make money with it, and those few are most likely the ones selling the tools for mining rather than those trading the currencies themselves.
Consider that while the markets are on their way up, almost everybody makes money, no matter what their trading strategy. It is, however, difficult to beat the market, and on the way down, everyone loses money (except for the exchanges).
A valid strategy might be to buy and sell Bitcoins on an exchange and then sell them at a markup over the counter to people who do not have access to a Bitcoin exchange. However, this carries significant fraud risks, and you must carefully study the laws in your country, as you might have a duty to collect personal information on the people you trade with or even register as a foreign currency exchange.
Over the long run, the dominant strategy is to buy and hold, and not to try to beat the market. There is no legal investor protection in Bitcoin, and most exchanges exist in a legal gray area where the laws of stock and commodities markets do not apply. Price manipulation and trickery exist everywhere.
- Keep your Bitcoins in a wallet that you exclusively control, and never on an exchange
- Buy and sell when you have to, but don’t try to time the market unless you have significant training in trading volatile and risky assets
You could lose your Bitcoin in a scam
Usually, “diversifying” seems like pretty solid investment advice. Never put all your money into one stock or even one industry.
We are told to spread our savings around and let them grow, which works well in regulated markets, where you can invest in index funds, trackers or spread yourself around popular indices. You can trust the regulator to (for the most part) only list stock of companies that are conducting in actual business, have been vetted and approved for listing. Where something is listed is also a benchmark for the reputation of the stock, bond, or other security.
In the crypto world, anybody can create a cryptocurrency or launch an “Initial Coin Offering” (ICO), and many scammers are using that to their advantage. They invest a lot of money in advertising and claim they are building “the next big thing” and promise high returns.
- Make sure you understand the product you are buying, including its technology, economics, founding team, and the regulation around it
- Use the product you invested in. Does it work? Does it have bugs? Is it useful to you?
- Be careful with big claims and promises of returns
- What happens if the investment ultimately fails? Will you lose all your money? Will you financially be okay? Will you be able to pay all your bills?
- Secure your Bitcoins
- Secure your computer
- Keep a cool head
- Stay patient
- Be conservative in your investments
- Don’t take investment advice from VPN companies too seriously
Stay sane, stay Bitcoin solvent
Cryptocurrencies are still new and under development. It’s the wild west era of a new age of finance, which means great opportunity and significant risk. It is more important than usual to stay vigilant, paranoid and suspicious.
Also published on Medium.