Cryptocurrencies are the talk of the town in the finance industry. And it’s no wonder, as their number jumped from 66 in 2013 to over 6,800 in October, according to Statista.
Working with clients in the cryptocurrency industry has given me insight into digital currencies. Let’s say you don’t know much about cryptocurrency, but are tempted to buy some. As cryptocurrency is still relatively new and unregulated, its risks are high. So, before buying your first crypto coins, think about these five things.
1. What are you buying?
A cryptocurrency is a form of digital-only money that is decentralized, meaning it is not controlled by a centralized entity, such as a government or a bank. To buy things using cryptocurrency, you will need a cryptocurrency wallet.
The transactions are peer-to-peer, so there is no middleman between you and the receiver. And your transactions will be recorded on a blockchain.
One of the main selling points of cryptocurrencies is their investment potential. Because of the market’s high volatility, many people invest in cryptocurrency seeking quick gains. But successful crypto investing is not that simple: This market is prone to speculation. The price of coins depends on the supply and demand principle, as most coins aren’t backed by anything analog.
And, because cryptocurrencies are a relatively new phenomenon, scammers play off people’s lack of education about the processes involved with crypto to make a quick buck themselves. According to the U.S. Federal Trade Commission, from October 2020 to May 2021, crypto fraudsters scammed consumers out of over $80 million.
A 2021 report by Chainalysis found that Africa is the region most exposed to illicit crypto addresses. Eastern Europe is a close second, but is larger in terms of its cryptocurrency economy.
Overall, consumers in Western Europe have sent the most money to illicit addresses among other regions — almost $1.5 billion from July 2020 to July 2021.
This is why it’s important to investigate any cryptocurrency before buying it. Talk to your financial advisor.
2. Is cryptocurrency a good choice for you?
Cryptocurrencies are rising thanks to interest from institutional and retail investors. But is crypto right for you? Many finance experts warn that you could lose all your money investing in crypto.
Whether that happens depends on many factors, but seriously consider that possibility before putting your hard-earned money into these markets.
3. If you do decide to buy cryptocurrency, how can you spot the legitimate ones from the scams?
As mentioned before, there are thousands of cryptocurrencies. How do you determine which ones are legitimate, such as bitcoin? Some cryptocurrency creators do a rug pull. To put it simply, they create a cryptocurrency and advertise it ferociously, promising great terms and selling an intriguing story behind it.
Once they get enough investors, these creators suck the coin’s liquidity pool dry, making the price of the cryptocurrency fall to zero. How do you avoid such scams? Well, if something sounds too good to be true, it likely is.
I can’t stress this enough: Learn everything you can about the cryptocurrency you find appealing. Better yet: Seek help from a professional. Have you ever heard the warning “caveat emptor”? It’s Latin and basically means buyer beware.
4. Remember that most cryptocurrency is not regulated.
Be vigilant when you’re buying cryptocurrencies. Sure, cryptocurrency may be easy to buy, but it’s also easy to lose money with it. And if you do lose your money, did you buy that crypto on something that’s regulated?
A good example is Mt. Gox, a Japanese exchange that collapsed in 2014. At the time, it was the biggest exchange for bitcoin in the world, and yet hackers stole $460 million from it. Cases like this are why regulation is so critical.
Make sure you back up your crypto wallet to have a possibility to restore it later if something goes wrong.
5. Remember cryptocurrencies are generally not recognized as legal tender.
National currencies — dollars, yuan, etc. — are created by governments and backed by them. That’s the issue some people have with money. They want money without the government involvement.
Banking is regulated by governments to prove that the money you claim you own is real. If the government doesn’t recognize the form of currency you have, then it’s not “real.”
Be patient.
The cryptocurrency market is on the rise, but so are cryptocurrency-related fraud and risk. You’ve likely heard success stories from people who got rich from crypto. But don’t let dreams of success blur your vision.
There are so many types of cryptocurrencies, so you need to prepare extensively before committing if you don’t want to just be taking chances. Examine the market and cryptocurrencies you are interested in, learn about their creators, observe and mark trade metrics, and consult experts.
With the cryptocurrency market expanding, a lot can change. Who knows, it may stabilize, and even fall under regulation in the future. But for now, proceed with caution.
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