Welcome to my free cryptocurrency educational series. Each part builds on the previous ones, so I suggest starting at the beginning and moving through part by part:
Cryptocurrency 101 series (core principles, social justice, blockchain tech, Bitcoin):
- Part 0 Overview of my series, who this is for, why you might consider listening to me, and how easy it is to think you understand crypto when you actually don’t.
- Part 1 Why should I care? What’s in it for me? Why is crypto important (it’s about a lot more than just making money!)?
- Part 2 How crypto actually works, why Bitcoin is valuable (even if it’s just “made up!”), and what you should know about blockchains (the tech behind them and how they could influence the future of our world)
- Part 3 How the blockchain keeps running, where new Bitcoins come from (i.e., how mining works), and concerns about Bitcoin’s environmental impact
- Part 4 How crypto offers autonomy, why it can’t be stopped, and the value of decentralization
- Part 5 How to store and use cryptocurrency, some basic cryptography, how wallets work, identity management, and the future of democracy
- Part 6 Overview of the different types of wallets, which one is best for you, what to be careful of, and why a hardware wallet might be worth the investment
Cryptocurrency 201 series (intermediate principles, Ethereum, NFT’s, DAO’s):
- Part 7 Ethereum (the #2 most popular cryptocurrency, and the one I’m most excited about), smart contracts, dapps, gas (and the high gas fee problem), Proof of Stake (PoS), and Ethereum 2.0
- Part 8 Coins vs. tokens, and some real Ethereum use cases—oracles and DEX’s
- Part 9 Intro to NFT’s (collectibles, research funding & historical significance, and music)
- Part 10 More categories of NFT’s (art, video games, virtual reality)
- Part 11 Wrapping up NFT’s (what you can actually do with them, upsides, downsides, risks)
- Part 12 DAO’s (organizations managed by algorithms, governance tokens, collective ownership, and the “network state”)
Cryptocurrency 301 series (advanced principles, DeFi, reinventing the finance world):
- Part 13 DeFi & CeFi, reinventing banking with peer-to-peer finance, stablecoins, and borrowing & lending
- Part 14 More DeFi (how Uniswap works, plus insurance, payments, derivatives, blockchains, exchanges, liquidity staking, and impermanent loss)
- Part 15 Wrapping up DeFi (why liquidity is important, LP tokens, yield farming, calculating return, yield aggregators, and major risks)
Cryptocurrency 401 series (investing, making money in crypto):
- Part 16 Intro to investing (what could go wrong, where you might fit in, and what kind of investing could be right for you)
- Part 17 Preparing to invest (how much money to put in, how to split it up to mitigate risk, setting up your wallets, buying the coins & tokens you want, and dealing with different blockchains)
- Part 18 More preparing to invest (security, understanding what price targets are realistic, and using “expected return” to choose between opportunities)
- Part 19 Specific investing options (buying and holding, index tokens, leveraged tokens, my list of coins and tokens, mining & staking, and lending)
- Part 20 Higher-risk, higher-reward opportunities (liquidity staking & yield farming, NFT’s, OlympusDAO, and Tomb Finance)
- Part 21 The single investment that’s made me the most money: StrongBlock
- Part 22 Wrapping up my seven categories of investment (including an update on StrongBlock)
- Part 23 How to invest depending on how much money you have (plus, the market dip, where my money is, and how to fit crypto into a larger investing strategy)
- Part 24 Holding coins & tokens vs. yield farming, where I’m putting my money now, big news on StrongBlock, and the future potential of crypto
- Part 25 Staying safe, preparing your taxes, avoiding scams, upgrading your security, and judging new projects
- Part 26 How to decide who to trust in the crypto world, technical analysis & market cycles, and an update on my longish-term portfolio
- Part 27 (in progress) Wrap-up
This is part 16 in my cryptocurrency educational series.
Part 16 Reading Time: 36 minutes
Want to listen to this post instead?
In the next few posts, I’m not just going to teach you how to invest in crypto.
I’m going to teach you the most important things about investing in general. Then, we’ll move on to specific considerations for crypto.
You might be tempted to just skip to the crypto part. But, as someone who’s seriously invested in stocks for nearly 20 years and crypto for many hundreds of hours over the past year, I can tell you that the most fundamental rules of investing apply equally to both.
Even though the practice of investing in crypto is relatively new, the good news is that we can learn a lot from the common pitfalls in stock investing.
Successful investing in the stock market depends on more than just making good stock picks. And similarly:
There’s a lot more to successful crypto investing than just picking the right cryptocurrencies.
If you’re brand new to investing in general, this post is a great place to start. And even if you already have experience investing in either stocks or crypto, I suspect you’ll still learn something here.
Picking the right crypto projects to invest in will be just one part of your success or failure. The rest will come down to things like psychology (e.g., how you’ll react when your investments suddenly dip), risk management (how you spread out your risk and keep yourself safe), and asset allocation (how much of your money you put into each investment opportunity).
Now more than ever, I’ll reiterate: I’m not an investment advisor, and I’m not an expert in any of this. But, I’ve made all sorts of mistakes and learned a lot along the way, and I’ll do my best to prepare you so you enter this world a little savvier.
Investing 101: How to think about all this and make money in crypto
At a high level, investing generally comes down to risk versus reward: Are you willing to take on more risk for more reward? Or do you want to reduce the chances that things will go poorly, but, in exchange, you’ll accept a lower return on your investment?
I suggest you always be skeptical when you hear people talking about huge amounts of money they’ve made in crypto—or any investment.
It could be true, and it could also be true that they managed to do very well with one investment (maybe they got lucky or received a good tip); but, that doesn’t necessarily mean they’ll do well with a different investment or that their original one will continue to do well.
It can often be easy to make one good pick, but consistently picking winners is extremely difficult—even for professional traders.
Here’s a hard truth: Everyone wants to beat the market, but that’s very difficult.
To make an outsized amount of money, you need at least one of the following:
- A willingness to take on more risk than most people (and quite possibly end up losing more);
- Access to more capital than most people (i.e., you have a lot of money saved up that you can afford to lose, or you’re able to borrow money from wealthy friends);
- Special knowledge (i.e., you understand economics better than most people, you have insider knowledge about a new cryptocurrency that’s about to launch, you’re savvy enough to deeply understand why an emerging technology will be fundamentally superior to what exists now, etc.);
- An ability and desire to work in this space (i.e., you have the technical ability to create or contribute to a crypto project directly);
- Or, you’re willing to put in a lot more time and effort than most people are to deeply understand this stuff so that you can spot trends and intelligently pick projects that are more likely to succeed. (In my case, that literally required hundreds of hours, and I certainly won’t claim to be amazing at it. With this series though, I’ve aimed to help you understand all this more quickly, so hopefully you’ll be up to speed in less time than it took me.)
If you can’t or don’t want to do one of those five things, you can keep things simple:
Get on Coinbase and just buy ETH—a small enough amount that your life would not be highly impacted if you lost it all—then, simply hold it for a few years and don’t even look at it regularly.
Or, to diversify a bit, you can buy a simple mix like 70% ETH and 30% BTC (or, 65% ETH, 17.5% BTC, 17.5% SOL).
Don’t worry: This post and the next one are going to go into a lot of detail on the philosophy, psychology, and practices of investing; but, in Part 18, I’ll give you some more examples of specific, ready-made portfolios and asset allocations that you might consider. So, you don’t have to figure all that out on your own.
Again, none of this is investment advice (because I don’t know your specific situation); but, if it all gets too overwhelming, I’m pretty confident that just keeping things simple and buying ETH (or ETH + BTC + another well-reputed blockchain token like SOL) would serve you just fine.
If you want bigger returns (and more diversified risk) though, you’ll need to do a little more work, and you’ll need to be careful to manage both your risk level and your security. This post and the next one will hopefully help you do that.
Before you dive in though, you might consider your specific niche.
Ask yourself this: Where should you fit in here? What kind of investing is right for you?
There are so many different opportunities in crypto right now that it can be hard to decide where to jump in. This is a major new ecosystem encompassing everything from finance to art to new social structures.
There are an immense number of ways you could get involved and roles that are needed—from simply being content with making money, to wanting to contribute or make some kind of impact in this space.
So, what kind of person are you?
- Some people are really good at researching and synthesizing information. Are you the type to keep dozens of tabs open, to subscribe to lots of subreddits or Discord channels, to dive deep into understanding what’s currently missing from the crypto world and who’s working on a solution?
- The ideal place for you might be dabbling all over and building a highly diversified portfolio. (This is what I do.)
- Some people are highly technical and focused, not just in terms of programming, but in finance, economics, cryptography, art collecting, or whatever else. Are you the type to actually read the entire white paper on a new project? To open up the code and figure out how it works? To ask technical questions to make sure you truly understand it? To contribute to the code base itself?
- The ideal place for you might be joining a DAO or focusing on a specific project or blockchain ecosystem.
- Some people’s skill lies in psychology and networking (the social kind). Are you active on Twitter? Do you enjoy connecting with lots of people, understanding who the key players are, introducing people to each other, interviewing people, and identifying the rising stars?
- The ideal place for you might be figuring out who to trust and then just following their advice; or, maybe you can help connect people or support them in creating something great.
- There are many other ways you could choose to get involved too:
- Maybe you’re fascinated by currency fluctuations and you’d like to focus on arbitrage and making small amounts of money over and over again.
- Maybe you have a real eye for art and you’d like to focus on the NFT world and spotting the most promising up-and-coming artists.
- Maybe you really understand the psychology of gaming and you want to focus on buying up land in virtual game worlds so you can design compelling gameplay experiences for people.
- Maybe you have a background in law and you want to focus on the emerging legal structures around DAO’s, NFT’s, or other aspects of the metaverse.
- Maybe you have a personality type geared toward collecting and you love the idea of identifying which attributes in various NFT collections are most rare and will likely go up in value.
As you can see, there are all sorts of ways you could invest in crypto—whether “investing” means money, time, or energy.
Ask yourself where your personal advantage could be and where you might be weaker.
For example, I personally don’t follow public sector companies very closely, so I just buy an S&P 500 ETF rather than the stocks of specific companies. But, I do spend a lot more time researching the crypto world than most people do, so I believe it makes sense for me to make more specific picks there.
I also seem to be better than most people at keeping track of a lot of different blockchains and projects at once, so it makes sense for someone with my personality type to have an extremely diversified portfolio. In contrast, someone else might decide, for example, to focus specifically on deeply understanding a single blockchain ecosystem, or on being the first one to identify the most desirable attributes in new NFT collectible series as soon as they launch.
Ok, now that you’re thinking about where you might best fit in and what investment style might be right for you, it’s important to remember again that while there’s a huge amount of opportunity here, there are also a lot of ways you could lose your money.
What could go wrong? (and what to do about it)
If you read my previous posts on DeFi, you might be quite tempted by the incredible returns. Indeed, they can be many times higher than what the stock market offers, and many many times higher than what a savings account would give you.
Before you actually start investing in crypto though (particularly DeFi), I want you to understand why it’s not just a guaranteed way to make a lot of money.
Here are the eight major types of risk that I’ve identified:
#1: User error (accidental mistakes or insufficient knowledge)
Unfortunately, there are so many mistakes that you could make along your crypto journey. Most of the user interfaces on these crypto projects aren’t sleek and intuitive. And, when you’re dealing with large sums of money that can’t be recovered if you mess up, you have to be so careful to double-check every little thing. Copying and pasting incorrectly could easily cost you thousands of dollars.
Here are some examples of mistakes you might make in the “user error” category, along with a solution for each:
- Sending a cryptocurrency to the wrong type of wallet. For example, say you want to invest both BTC and ETH into a lending platform like BlockFi or Nexo. You might send over your BTC first to their Bitcoin wallet address and then accidentally send your ETH to that same address instead of to their Ethereum wallet one. Luckily, many of these platforms will warn you if the address format doesn’t look like the right blockchain, but not all of them will.
- Solution: Double-check everything. I often pop back and forth between tabs multiple times before finally executing an important transacton. Write everything down too so you remember what you did and why.
- Missing a decimal point. Most of us aren’t used to dealing with a lot of decimal points in financial transactions. But with something like Bitcoin, there’s a big difference between .03 BTC and .003 BTC (that’s a $1,700 USD difference). Worse, something like Shiba Inu coin has a conversion ratio of 1 SHIB to $0.00000832—pretty easy to get the number of zeroes wrong.
- Solution: Copy and paste, don’t just eyeball it.
- Losing your wallet or your private key (or seed phrase). Remember that there’s no “forgot your password” button in the crypto world. If you lose your keys or your access to your wallet, your money is simply gone. There’s no one to call to help you get it back.
- Solution: Back up everything, and never share your private key or seed phrase. See the “security” section in the next post.
- Thinking you lost coins or tokens when they’re in fact properly associated with your public key but simply not visible in the wallet software you’re using. Say I transfer a less popular cryptocurrency like NFTX to my MetaMask wallet. Back when I was less experienced, I would have been pretty worried when it didn’t seem to show up. But now I know that some tokens might properly transfer but either (a) be unsupported by the particular wallet software I’m using, or (b) need to be manually added so they appear in that software. In either case, as long as you got the blockchain right, the transaction would have been properly logged on the blockchain but simply not visible in the wallet.
- Solution: In the case of something like NFTX, it’s an ERC-20 (Ethereum-based) token, so you can manually add it in MetaMask by opening the Assets tab, scrolling to the bottom, and hitting Import Token then Custom Token. You’ll need the token’s Contract Address, which you can get by searching for that token on CoinGecko.com. For example, here’s NFTX’s page, and the Contract Address is on the top-right.
- Don’t worry about the order either: If it’s an ERC-20 token like NFTX, it’ll still safely arrive in your MetaMask even if you haven’t imported the custom token yet. You just won’t see it until you take that step.
- By the way, to figure out if something is an ERC-20 token, search for that token on Etherscan.io and you should see an ERC-20 label on the top-left. For example, here’s NFTX’s page on there.
- Not fully understanding what you’re getting yourself into. This is a huge risk because of how complex all this stuff is. For example, as you get deeper into this world, you’ll find all sorts of articles and YouTube tutorials on how to execute complex investment maneuvers—e.g., (1) buy coins X and Y on a less-popular exchange, (2) provide liquidity on some platform, (3) take the LP token you get from that and stake it on a different platform, (4) etc. It’s easy to make a mistake at any step of the way there. Believe me: There have been many times when I thought I understood one of these things and then I realized on step 3 or step 4 that all this was costing more in gas fees and taking longer than I bargained for, and by that point, it can feel hard to get back out. Another example is that I would eventually realize that some investment platform was paying me the high interest rate they promised in some weird obscure coin rather than in the main coin I’d been anticipating.
- Solution: Research everything before jumping in. Take your time to get it right. Read multiple tutorials from different sources before trying out something risky.
- Not fully taking into account all the fees and gas costs. Especially when you’re dealing with the kind of multi-step strategy I mentioned above, it’s easy to realize by step 4 that you’ve already paid 15% of the total amount you’re investing in gas fees, so that 20% interest rate you were promised is now only going to net you 5%. Please remember to take all the fees into account, especially if you’re working with a small amount of money to invest. Gas fees have gotten crazy, so a lot of DeFi investment strategies are not at all worth it if you can only afford to put in less than $1,000 USD.
- Solution: Do your research, understand how many transactions will be required, and carefully read the gas preview in MetaMask before confirming (you can always reject the transaction from there before committing). Also, check the current gas rates on Etherscan and historical gas trends on Ethereumprice.org to find a good time to execute the transaction.
- Forgetting about taxes. I’m not as aware of tax law elsewhere; but, if you live in the United States at least, the IRS has been cracking down on money earned through crypto investing. In particular, they demand records from Coinbase and other companies based in the US. So, even if you spend most of your time in the DeFi space, Coinbase will still have a record of whenever you convert your profits into USD and transfer them out into your bank. The tax laws around crypto are still new, but they’re quite complex and far-reaching. Almost anything is considered a taxable event, including swapping one coin or token for another.
- Solution: Do some reading to begin to understand how taxes work with crypto. For example, it’s important to know that long-term gains (i.e., if you hold an asset for a year before selling) are taxed at a lower rate.
- As you make profits in your trading, set aside somewhere between 20-40% to cover taxes, depending on your tax bracket and how long you’ve held your crypto for.
- Hire an accountant who specializes in crypto. This can be expensive, but it’s better than a tax audit from the IRS.
- Or, you can try to do it all yourself if you’re not going too crazy with your trading. Luckily, there are several different apps that can help calculate your taxes for you—they’ll even connect directly to Coinbase, your Ethereum wallet, etc. to download your transaction records (make sure when you set up those connections you always select the “read-only” option for security purposes). None of these apps is perfect, but my favorites so far are: Koinly.io, CoinTracking.info, and I’ve heard good things about TaxBit.com. I’m personally going to keep comparing these and investigating in a lot more detail as we approach tax season.
- Buying high, selling low. We’ve probably all heard the famous investment maxim to “buy low and sell high.” It seems obvious, right? But the reality is that many of us fail here anyway. How?
- Imagine what it feels like when your big investment suddenly drops unexpectedly. Then it drops again, and it keeps falling. At some point, most of us will begin to panic. And in that moment, you might feel like the only thing you have control over is to sell and pull out of that investment. What if it drops even further and doesn’t recover? So, you sell, and soon after, it might begin going back up—meaning that you ended up “selling low.”
- Similarly, imagine what it feels like if you bought into an investment with only a small amount to test the waters. But the price suddenly begins rising. Oh no, you don’t want to miss out! What if it never comes back down and you miss your chance? Well, the only thing you can do is buy even more right now! And, that might be right when it begins dropping, meaning you “bought high.”
- Solution: Don’t try to time the market. If you believe in something, just buy into it. If you stop believing in it, sell it. Otherwise, hold. More on this in the next post.
- Holding instead of taking profits, or taking profits instead of holding. It can be very difficult to decide when to pull out of an investment.
- First, you might be greedy—your investment has risen so much in value that you want to hold on forever and hope it keeps going up. Then it begins to decline and you keep holding on, hoping this is just a little dip and it’ll be back up soon. But then it keeps declining and you end up losing most of your profits.
- Otherwise, you might be too careful—your investment rises a bit in value and you sell to lock in your profits. But, the price keeps going way up after that and you end up losing out on huge potential gains.
- Solution: Don’t sell all at once. Once you’ve made back your original investment, consider selling half. Then, maybe if it rises another 10%, you sell some more, and so on. Make a plan and stick to it. Or, just make the commitment to hold something you believe in for years.
- Going all-in instead of diversifying, or the opposite. Asset allocation can be tricky—i.e., deciding how much of your money to put into each asset or opportunity.
- First, you might see an opportunity that seems almost too good to be true, but it feels like you’d be a fool to pass up something so promising. Unfortunately, since you put all your eggs in one basket, when it ends up being hacked or it turns out to be a scam, you’ve lost everything.
- Or, you might be so risk-averse that you split up your investment money across a hundred different investments, but each one is so small that even if it takes off you’ve barely made any profit.
- Solution: Diversify, but not across so many different assets that it’s just a tiny amount in each. Invest greater amounts in more solid opportunities, and put smaller amounts into riskier ones. More on this in the next post.
#3: Stablecoins not actually being stable
So much of the crypto world is based on a foundation of stablecoins, since those are supposed to represent a trustworthy asset like the US dollar or the value of gold.
There’s currently over $70B worth of Tether (USDT) alone out there, nevermind all the other stablecoins. Imagine what would happen if people suddenly lost faith in a stablecoin like USDT—either because it gets hacked somehow, the organization behind it turned out to be malicious, or it came out that they’d been lying about the traditional assets they’re holding to back all those stablecoins.
Billions of dollars worth of other coins and tokens like BTC and ETH were purchased using stablecoins like USDT, so if it turns out that those stablecoins weren’t legitimate, it means that all that BTC and ETH were bought using worthless “Monopoly” money.
That could easily devastate the entire crypto ecosystem, though I do feel confident that it would recover within a few years at the most (again, the value of all this stuff—including gold—is just “made up” anyway and not intrinsic; it’s really just based on belief, so if enough influential people decide that the ETH bought using USDT is still valid, then it will retain its value).
In any case, there are already more solid stablecoins like UST emerging that keep their peg using complex algorithms rather than needing the backing of traditional assets; so, I’m hopeful that we’ll transition more and more toward those.
Solution: Tether (USDT) specifically doesn’t inspire a lot of confidence in me, so I’d advise staying away from that one in particular. Stick with USDC and UST if you can.
#3b: Stablecoins not actually being decentralized
To go just a bit deeper down the stablecoin rabbit hole, it’s worth knowing that many stablecoins, including USDC, aren’t completely decentralized. In other words, they’re controlled to some extent by the organization that created them.
In USDC’s case, it was created by a group called Centre, which is a partnership between Coinbase and another crypto company called Circle, both of which are based in the United States.
So, even though this doesn’t seem highly likely at this point, it’s theoretically possible that the US government could require Centre to update the code behind USDC to, for example, require KYC to use USDC.
KYC stands for “know your customer,” and it refers to a requirement to verify a customer’s identity before they can use your company’s service—for example, by having them submit a photo of their driver’s license.
In fact, the US government just passed some crypto legislation like this as part of the big infrastructure bill, but crypto proponents are hoping we can still fight it with amendments before it actually goes into effect in 2023.
In an absolute worst-case scenario, Centre could potentially implement code to block certain wallet addresses from using USDC. This would of course go directly against the censorship- and oppression-resistance that’s so fundamental to crypto. So, please keep paying attention to what our government is doing here. It’s easy to think it’s not a big deal when small freedoms are eroded—until suddenly that freedom is all gone and we’re back to a centralized ecosystem.
To be clear, so far USDC has been my personal favorite stablecoin to use, so I don’t want to scare you or imply that Centre is not trustworthy. I’m just pointing out the possibility since USDC is not fully decentralized.
In contrast, next-generation stablecoins like UST and OHM were created with the intent of being fully decentralized and not vulnerable to this kind of thing.
Again though, you probably don’t need to worry about this, and I think you should feel 95% safe using USDC regularly. We just have to be careful here as the crypto world keeps developing that we stay true to the original vision of full decentralization, which is the attribute that offers the protection from censorship and oppression that I’ve described in previous posts.
#4: Market manipulation
Just like with the stock market, the crypto market often experiences big ups and downs purely due to manipulation from famous, rich, or otherwise powerful people and institutions.
It was a joke / sad reality in the crypto community for a while that whenever Elon Musk tweeted about Dogecoin, the price would immediately go up or down based on the sentiment he’d expressed.
Similarly, as more hedge funds and powerful institutions move into the crypto world, they’ll be able to exert influence simply by buying and selling large amounts of any given coin or token. It’s inevitable that the average investor is psychologically affected when they see a sudden huge spike in the buying or selling of something.
For example, you can see in this article how a single “whale” (i.e., big, wealthy) investor had a major impact on the Bitcoin market when they sold 30,000 BTC back in 2014.
Solution: There are more complex ways that whales can manipulate the market as well, but the best thing we smaller fish investors can do is hold through those times of turmoil rather than getting caught up in the panic and trying to copy whatever action the whale just took (by then it’ll probably too late to get the same benefit that they did). At the end of the day, if you truly believe in your investment, the best thing to do is just keep holding and wait for it to go back up in the future.
Here are four common types of scams in the crypto space, along with how to avoid them:
- Pump and dumps—where a person or a group invests in a coin or token that they (secretly) don’t intend to hold long-term. Then, they pump it up, heavily marketing it on social media and telling everyone how much money they’ll make if they buy in too. Finally, once enough people have invested and pushed the price up, the original person or group sells all their holdings, sending the price tumbling back down.
- Solution: Do your research. Don’t just buy something because some influencer is hyping it up. Make sure you really understand what it is, how it works, and who else is backing it. To be clear, just because someone owns a coin or token and talks it up on social media doesn’t mean it’s a pump and dump. They might genuinely believe in it and intend to hold it long-term. But this is why you shouldn’t just rely on any single source for your information. More on this in the next couple of posts.
- Rug pulls—where a group creates a new cryptocurrency that actually seems to work, but then they abandon the project and steal all the profits. This can be trickier than pump and dumps since, with a rug pull, they might create a fully-functioning website where you can even earn money for a little while. Everything seems to be going fine until you log in one day and nothing is working anymore or the value of the coin or token has suddenly dropped dramatically.
- Solution: When you’re looking at a new cryptocurrency, check out the team behind it, who else is following it, what people on Reddit are saying about it, whether third-party audits have been done (and whether they found high-priority bugs), etc. And as always, if it seems too good to be true, it probably is.
- Bottom line, do your research. Here are some good places to start:
- Rugdoc is a website devoted to examining new crypto platforms and dapps and calling out ones that look risky.
- DeFi Pulse (and their DeFi List) is another great source for what’s trustworthy in DeFi.
- Here are a few others that seem great as well but I haven’t done as much research on: DeFi Prime, DeFi Safety, and DeFi Watch.
- Con-type scams—where someone tricks you into doing something you shouldn’t. For example, say something isn’t working right with your MetaMask wallet and you ask for help on Reddit, Discord, or social media. Someone with an official-looking title (“Michael from MetaMask”) direct messages you offering to help, and he tells you that this is a known bug with the wallet; but, don’t worry, “his team” will be happy to assist you—all you have to do is send him your private key or seed phrase to prove you’re the owner of the wallet (or, you just have to share your screen and click a few things that reveal that information). A few minutes later, your wallet is empty.
- Solution: Again, never ever share your private key or seed phrase. Never even type it on a computer (unless you’re entering it directly into your wallet app to install it for the first time on a new machine, for example). Plus, if you use a hardware wallet, you’ll have even more protection.
- Fake websites—where a website looks just like SushiSwap, Coinbase, etc. but it’s actually run by a scammer. Some of these are so sophisticated that the homepage will look exactly the same. You’ll enter your username and password or connect your wallet as usual, but everything you enter is being logged by the scammer.
- Solution: I suggest never trying to type a crypto website URL into your browser—if you accidentally make a typo, that might send you to a scam site. Also, never click links in emails or websites unless you trust the author. The safest thing is to (a) bookmark the crypto sites you use frequently, and (b) Google them (e.g., “uniswap”) and click one of the top results, since a scam site is unlikely to appear that high in the search rankings. (Be careful though that you’re clicking one of the real search results though and not an ad.)
As I’ve explained before, crypto is large enough and distributed enough now that no single government could shut it down. That said, any government could easily regulate the centralized exchanges based in their country, and they could also pass laws around taxes that make crypto trading difficult or expensive.
For example, in September, Coinbase finally gave up on launching a new lending product after pressure from the SEC, even though Coinbase seemed to be doing their best to proactively work with regulators to follow the rules. Again though, that regulation only worked because Coinbase is a centralized platform (i.e., CeFi). Unfortunately for Coinbase, their decentralized (i.e., DeFi) competitors have already been running lending platforms like that for a while without being able to be stopped by the SEC.
If this kind of over-regulation continues, it will likely continue to drive crypto companies out of the United States and stifle innovation. It feels to me like there are enough people in the US government who understand this though that things will ultimately turn out ok; but, there will almost certainly be some major battles to be fought along the way over the next several years.
Solution: Get ready to call your government representatives and make your voice heard. If you follow crypto influencers on Twitter (I’ll share my favorites in a future episode), they’ll most likely tweet out when there are important crypto-related regulations about to be voted on in major governments like the United States.
Again, remember that DeFi represents a major threat to traditional financial institutions, so there’s going to be a lot of money behind efforts to fight crypto. We have to be highly vigilant and recruit as many people as we can to contact our elected representatives when legislative threats like that appear (for example, the recent infrastructure bill that just passed earlier in November).
#7: Hacking (technical exploits)
As you can imagine, there are a lot of appealing targets in the crypto space for hackers.
Smart contracts might seem like magical things that ensure flawlessly safe transactions; but, they’re just code written by humans. All code has bugs. Some of these are minor, but some can give hackers entry points to manipulate things or steal investors’ cryptocurrency.
Solution: The best thing you can do here is to only invest in projects you trust, look for third-party audits, and ensure you have tight security yourself (with your wallet, your computer operating system, your browser, etc.). More on this in the next episode.
#8: Coordinated attacks by huge entities
There’s always the threat of direct attacks on the blockchain by state-level entities like China. The best thing we can do here is continue to strengthen the major blockchain networks by adding more nodes, keeping those nodes updated with the latest security patches, and pushing for crypto-friendly legislation in less-authoritarian countries so that more nodes can be installed there. I cover the threat from the Chinese government in more detail in Part 4.
As you can see, crypto has the potential to make you a lot of money, but there are a lot of risks to be aware of too.
Now that you hopefully have a better idea of what you’re getting yourself into, in the next post we’ll explore how to actually set things up so you can safely invest in the crypto world.