Bitcoin and other cryptocurrencies, 4 things to know before you invest

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cryptocurrencies

Cryptocurrencies such as Bitcoin require certain fundamental requirements before investing. Prepare well and avoid the most common mistakes.

Invest? You need luck

It is true that luck is not a requirement but a circumstance, and it is also true that in life it takes luck a bit in everything. This type of investment looks like a damn gamble where the always-winning house is the exchange, that is the online platform where these virtual currencies of dubious utility and an uncertain future are bought, sold and exchanged.

The value of Bitcoin and other cryptocurrencies rises and falls (volatility) as a result of mostly unpredictable speculations. The so-called “whales” are big players who move huge capital influencing the market in order to make profits for themselves. Luck matters much less to them, as they have a good degree of control over the exchange rates.

For a “normal” investor like you, the only chance to profit in this market with few and dubious rules is to cross your fingers hoping that these often nameless and faceless whales will make choices compatible with yours. Anyway, luck must be helped. Let’s see how.

Discipline in chaos

It is good practice that you set yourself a goal and pursuit it with discipline without getting caught up in feelings like enthusiasm, fear, and greed. If you buy 100 USD of a certain cryptocurrency and set yourself a profit of 20% then sell when the value has reached 120 USD without hesitation. The more you try to get rich, the more you risk becoming poor. Learn to be satisfied without wanting more.

Each cryptocurrency is supported by a generally very active community trying to spread hype in order to encourage their purchase and therefore to increase their value, so follow them with a grain of salt.

You need to know that buying a certain amount of cryptocurrency in many cases means buying a certain amount of nothing. Except in rare cases it is not possible to spend it in the real world, and when possible it is less convenient than using traditional money due to transfer time and cost.

You may come across White Papers describing the prodigious properties of crypto projects born with the aim of giving humanity a better future. Stay alert, the intentions may not be so noble.

A rather widespread phenomenon is that of Initial Coin Offerings (ICOs), poorly regulated crowdfunding initiatives which aim to raise funds for new cryptocurrencies. Participating in it involves a high risk compared to the chance of a high return in the medium-long term, if things go well.

Also beware of influencers, people who can drive the buying decisions of others. Unlike whales, they show their (poker) faces. Sometimes they just claim to have bought a certain cryptocurrency. Sometimes they go so far as to make predictions about the value of it. In the latter case, a phenomenon that is dystopian and paradoxical often occurs: the prediction of the event determines the event itself and the cryptocurrency “magically” increases in value due to the greater demand on the market.

Also listen to the voices out of the chorus, you could open your eyes and make you change your mind about what to do. Here’s what Jamie Zawinski, the founder of Mozilla, thinks about it.

Jamie Zawinski tweet

One of cryptocurrency’s most vocal skeptics is Nicholas Weaver, senior staff researcher at the International Computer Science Institute and lecturer in the computer science department at UC Berkeley. There is a video where he explains very well why we should put an end to this ASAP. He later explored some topics in an interview.

Technical knowledge and safety

Adequate technical knowledge is necessary because managing your crypto-assets requires good IT security bases, without which you are likely to make mistakes with more or less serious consequences.

“Invest in what you know” is another fundamental rule, and this is really difficult to respect given the speed at which this sector develops. Basically all cryptocurrencies are bits moving on a network called Blockchain. Their value is established by the market through exchanges.

Stablecoins deserve a separate note. Those are particular cryptocurrencies whose value is anchored to that of a fiat currency (legal money, for example dollar) or a precious metal. Switching from a “normal” cryptocurrency to a stablecoin serves to protect you from the volatility of prices for a short or long period. Often it is the step immediately preceding the cash-out, i.e. the exchange to fiat currency.

Wallets are software with which you manage your cryptocurrencies and interact with the Blockchain. Transferring a cryptocurrency from one address to another can have no cost, fixed cost, or variable cost. In the latter case, everything depends on the volume of traffic present at that moment on the Blockchain on which that particular cryptocurrency moves.

The speed at which the transfer takes place also varies, and in many cases depends on the network fee you have chosen to pay for the service. This is done by miners, which are companies or individuals who provide the computers through which the Blockchain performs. The higher the network fee you have decided to pay, the faster the miners complete your transfer.

Wallets and exchanges by their nature must be used in full autonomy. Having a consultant to provide support is complicated because it requires a very high degree of trust, so relying on other people opens up to abuse and scams.

Your wallets can reside on one or more exchanges (custodial wallets) or be managed independently by you (non-custodial wallets). In the latter case, they can be software or hardware. If you lose your password (private key) you lose access to your cryptocurrencies and nobody can help you, so use a good password manager (read our article about it) and store the private keys of all your wallets there.

Bitcoin, cryptocurrencies and privacy

You can buy, store and trade Bitcoin and other cryptocurrencies anonymously with the appropriate precautions. To do this, you must use decentralized exchanges (DEX) that do not verify the identity of their customers (KYC), and store your funds in one or more non-custodial wallets that only you access.

For the majority of cryptocurrencies, transactions are publicly visible on the relevant Blockchain. This means that if someone knows the address managed by your wallet, they can take their curiosity to take a look at the history of all your transactions and the resulting balance. Some cryptocurrencies with strong privacy and anonymity features are exceptions. An example is Monero, whose transactions are not publicly visible because its Blockchain does not expose them.

Closing words

Only invest what you can afford to lose. To manage Bitcoin and other cryptocurrencies, you need to have certain personal characteristics and solid technical skills. If the awareness of moving in a high-risk context doesn’t discourage you, try it and have fun. Do your best to fully enjoy the pure adrenaline thrills that this activity can give you.

Half the fun is in discovery, and this article was born with the intent of providing generic guidance based on knowledge and prudence. This is the reason you can’t find advice on which cryptocurrencies to choose for your investments, which exchanges to use or which wallets to adopt. Do a lot of research, and if you think you’ve done enough… do more. Don’t fall victim to promises of easy money. Don’t get addicted to it. Keep your eyes peeled, new scams arise every day. Good luck! (you will need it)

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