2017 was more successful than perhaps even the most fanatical crypto-promoter could’ve imagined. At the beginning of the year Bitcoin was trading for under $1,000, and by the end it had truly lifted off, threatening to break the $20,000 barrier. The altcoin market also grew exponentially, and more than a few other coins (Ethereum, Litecoin, and Ripple) grabbed a piece of the limelight.
But it was Bitcoin that remained front and center, becoming mainstream news along the way. As BTC became the talk of the town, new investors arrived by the boatload.
Meanwhile, average Joes were posting about Bitcoin on Facebook, crypto-related search traffic went crazy, every podcast suddenly started mentioning crypto, people took out mortgages to buy Bitcoin, and newly joined Redditors said things like, “I don’t know what it is but I want some!”
This is what an investment hysteria looks like.
Many have warned that crypto is in serious bubble territory, while others remain bullish despite the face-melting gains of the past year. Regardless of what the future holds, we thought it wise to lay out some safety tips and a few sanity checks. These are designed to help protect people new to the space, or act as reminders for the more experienced crowd.
1. Don’t Fall Victim to Hysteria
There’s this new, hot thing that everyone is talking about. It’s got some real mystique to it, it’s sexy, and it’s making a lot of people into millionaires. You want in. Unfortunately, this route into crypto is not the one that tends to lead to careful, rational, and strategic investing.
Your interest may have been sparked by the wave of hysteria that has swept across the world, but that doesn’t mean that you should come sprinting, credit card in hand. Fear of missing out, or FOMO, is a very real thing, and the successful investor must develop an immunity, or at least some resistance, to it. Emotions cloud the judgment needed for any successful investment. Acting on FOMO rarely leads to good outcomes, particularly when money is in play. Whether it be tulips, dot-com startups, or real estate, jumping into a stream of hype has ended poorly many times before.
Before we get attacked as FUD (fear, uncertainty, and doubt) peddlers or on the basis that these analogies don’t match, let us clarify that we’re not arguing against cryptocurrency investment – far from it! We’re simply advocating that people take a breath. It’s better to take a level-headed approach and carefully educate yourself before investing. Excitement is great, but don’t get sucked in by the meme circus or groupthink and fail to develop or stick to a plan.
Ask yourself these six questions. Don’t lose sight of your risk tolerance, a balanced asset allocation (rebalanced upon large price movements), and a time horizon that makes sense. Focus on basics like dollar-cost averaging, buying the dips, and worst-case scenarios to hedge against risk.
At a minimum, take the time to understand the basics of the technology. We’d argue that if you can’t cogently explain something, you probably shouldn’t invest in it.
2. Be Aware of Shills
A person engaged in covert advertising for money is a shill. The shill attempts to spread positive or negative sentiment by personally endorsing something in public forums with the pretense of sincerity.
Shills are typically paid for the service, but in terms of crypto, what it means to “shill” has broadened. Essentially, everyone in crypto has a vested interest in something and thus a motive for espousing a certain belief. This can be very innocent, like simply advocating for a great project you believe in. Or it can be very cynical, like taking money to promote an ICO you know to be a scam.
To add some precision to Jameson’s point: assume that everyone has a motive, be conservative with your trust, and figure things out for yourself whenever possible.
There are many different tactics that shills use, but suffice it to say that any large forum (trollboxes, bitcoin forums, Reddit, Twitter, etc.) has a number of shills. There is a huge din in the crypto space so, false information from shills or not, deciphering the signal from the noise is hard.
This means you need to have your BS sensor finely tuned and take what people say with a large grain of salt.
3. Handle ICOs With Care
In 2017, initial coin offerings raised almost 2 billion dollars. This figure would’ve been unthinkable just a few years ago, but it’s also easy to see the reason it happened. Getting in at ICO level allows individual investors to access potential 100xers that used to be mostly reserved for VCs, in the incredibly hot blockchain space no less.
The thing with ICOs is that they are unregulated, wildly speculative, and rife with scams. Entrepreneurs of all stripes have been trying to get in on the ICO craze, and many businesses have launched fundraising efforts with business plans or tech that could most charitably be called “long shots.”
Neophyte investors should approach ICOs with extreme caution. There are numerous high-profile scam cases already on the books, like Plexcoin and Confidio, and more are sure to follow. For reasons like this, users in cryptoland sometimes warn each other of the next “PonzICO,” a derisive conjunction of the words “ponzi scheme” and “ICO.”
To find expert warnings, one also needn’t look far. Jeff Garzik, a leading figure in the blockchain community who runs a consultancy called Bloq, says ICOs are “transformative,” but people need to be wary. “Ninety-nine percent of these ICOs will be garbage,” he says. “It’s like penny stocks but with less regulation” (as quoted in Fortune).
“Some are scams, some will simply fail to execute but those that actually have a legitimate use-case and gain traction will almost certainly be in a small minority.”
Many ICOs are for companies who have little to no market share and are predicated on the idea that they can bring in naive investors. With time, it is possible to develop a feeling for ICOs and the ability to sniff out the quality, but for beginners the wisest tactic is to steer clear.
4. Don’t Talk Too Much
If you’re new to crypto, you may want to turn to the forums for guidance. That’s fine, and there are plenty of good people willing to help (particularly at r/BitcoinBeginners/). But be measured in how much information you choose to share with others.
Don’t turn into one of those people who brag, like this Redditor who announced he/she had become an ETH millionaire. Even though this person used a throwaway Reddit account and didn’t give anything away in the post, doing so is still ill-advised, as it can open you to all sorts of dangers like being hacked or otherwise targeted.
Here are some good rules of thumb to follow if you plan on publicly talking about crypto.
- Don’t disclose the amount of your holdings.
- Don’t discuss the phone provider that you use.
- Set up a passphrase with your phone provider that must be submitted to them before they activate a new SIM.
- Set up 2-factor authentication with your email and exchanged related accounts. Link them to an app, not just your phone.
- Don’t disclose your crypto-related email accounts to anyone.
- Don’t reveal your real identity on sites like Reddit or other crypto forums.
- Don’t publicly disclose your phone number for a device on which you access crypto accounts or authorize anything.
There’s really no overstating how careful you need to be with your personal information. Anything related to your cryptocurrency dealings should have zero ties to any personal data that can be accessed by anyone other than you. Being sloppy with what you say or do online can have real consequences in your crypto holdings.
There are many more safety concerns than what is mentioned here – keeping custody of your coins, pump and dumps, properly diversifying, reporting taxes correctly, etc. – but these are four fundamental ways to start being safer.
As with any burgeoning technology, crypto comes with a number of pitfalls and will continue to attract unscrupulous individuals looking for a quick buck.
This needn’t deter you – rather, it should be a call to sharpen your defenses. Don’t invest what you cannot afford to lose, and remember that, above all else, the key to staying safe in cryptocurrency is research.