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Cryptocurrency: An Exciting Asset Class
The dawn of the cryptocurrency revolution has sparked tremendous excitement from a wide spectrum of individuals; from technology enthusiasts to retail investors keen on making a quick buck. Unsurprisingly, the fanfare around digital coins and tokens continues on an upward trajectory, given the increased media attention, as well as higher adoption rates of cryptocurrencies globally.
Cryptocurrencies were created to enable individuals to store, transact and manage their digital assets in a secure and immutable way, preventing other entities from having control over their dealings. The rise of numerous cryptocurrency exchanges allows anyone to acquire cryptocurrencies easily. Licensed cryptocurrency exchanges such as eToro should be the preferred place for new users to acquire cryptocurrencies. Not only that, eToro is an integrated platform that offers free market research and analysis tools to help you be informed on the step-by-step process of creating your cryptocurrency portfolio.
Here are a few essential things to know on your cryptocurrency journey, to ensure that it is free from anything but “real crypto”.
Avoiding Scams and Ponzi Schemes
One of the pitfalls of decentralization is that regulating the market is incredibly hard. A large number of ICOs and cryptocurrency projects are not regulated by any jurisdiction, meaning that fraudulent coins and sketchy projects are naturally rife. Hundreds of millions of dollars have been lost in ICO exit scams and Ponzi schemes that promised significant “guaranteed” returns to their victims[1]. Despite the complexity surrounding crypto, and the numerous risks associated with the crypto market, many are still attracted to the prospects of generating tremendous returns which could potentially outperform traditional financial assets by a mile.
It is therefore vital to invest only in coins and tokens that are legitimate and have a long-term trajectory. Equally important is the place to acquire cryptocurrencies. Always make sure that you buy cryptocurrencies from a legitimate and regulated cryptocurrency exchange like eToro where user funds are strictly secured in Tier 1 global banks. Additionally, eToro often encourages its clients to take safety measures and provides various tools for reducing risk while encouraging responsible trading.
With regards to investing in legitimate coins, here are several indicators that can be used to assess the credibility of a cryptocurrency project. Projects that display the following traits should generally be avoided:
- When there is no mention of the project’s team.
Note that even when team members are mentioned, you should always do due diligence, and verify in Linkedin or other social media that these are real people with legitimate profiles. - Unprofessional-looking website, which could either be unsecured or looks as though it was created in haste.
- A mediocre whitepaper, which does not properly explain the project and its underlying mechanisms, or one which is insubstantial, full of “fluff” and/or does not inspire credibility. (More about whitepapers below.)
- An explicit promise of guaranteed returns. One of the hallmarks of a Ponzi is a promise to pay significant returns over time. Remember, if it sounds too good to be true, it probably is.
Note: The above are just some of the more common signs to avoid when you are assessing a particular project.
Complex Derivatives and Margin Trading is Highly Risky
If you are new to the cryptocurrency space, you should avoid financial products such as derivatives, options and CFDs. These are complex financial assets that are highly risky, and should only be handled by sophisticated investors and institutions. The speed of innovation in the cryptocurrency space has seen numerous large exchanges offer many cryptocurrency derivatives and margin trading.
Investing in complex derivatives instruments is not the same as investing in the underlying cryptocurrency; if you purchase a Bitcoin CFD or options you are essentially buying into a contractual promise with another counterparty on the opposite end, rather than actually owning a cryptocurrency per se.
The best and easiest way to get exposure to the growing cryptocurrency market – especially if you are new – is to directly invest in coins and tokens and store them safely in your hardware wallet. Purchasing cryptocurrencies directly from renowned, regulated platforms such as eToro allows you absolute control over your cryptocurrencies, and you can, therefore, be assured that the coins you hold are “real.”
Research Is Your Best Friend
Performing due diligence before engaging in any investment decision is key to reducing your risk and ensuring that you own cryptocurrencies that are legitimate and have the potential to excel in the future. I’s always a good starting point to begin by acquiring well-established cryptocurrencies, such as Bitcoin and Ethereum. Once you have got more knowledge and experience under your belt, you can focus on expanding your portfolio by investing in other altcoins as well as venturing into more novel strategies such as staking.
Before putting your hard-earned money into newer cryptocurrencies, it is essential to understand the project. Make sure that you read the project’s whitepaper, which delves into the project and its modus operandi. Although it can get quite technical, you should be able to understand universal elements such as the problem the project is trying to solve, the benefit (utility) of holding the token and the depth of knowledge that transpires in the whitepaper. There are various resources that can help you get started in the cryptocurrency market, including Cointelegraph, the eToro blog, and Coindesk. eToro is an integrated platform that not only allows users access to free-market research and analysis tools but also a live news feed for users to conveniently and constantly be updated on the fast-paced cryptocurrency market. Adding to that, a social trading platform on eToro represents an innovative way to be connected with the close-knit cryptocurrency network and even allow users to copy trade various highly profitable traders that beginners can follow.
It’s really worthwhile reading up on the subject. Understanding various financial instruments and innovations in the cryptocurrency space can add tremendous value to your investment decisions. Decentralized finance (“Defi”) – ie the motivating power behind cryptocurrencies – is a fast-growing sector of the market that provides new modes of generating returns, so it could really benefit you to explore the latest the market has to offer.
Navigating Your Way
New technologies are often highly complex, which can be inherently intimidating to those who are just venturing into the cryptocurrency market. Ideally, the best way is to start small and gradually increase your exposure once you have acquired sufficient understanding and experience of the space. Trading on established and regulated exchanges – such as eToro – can also help provide an additional layer of security for your convenience.
[1] Report by Diar found that ICO exit scams have now cost investors nearly $100 million.
Image by Petre Barlea from Pixabay
