Editor's note: This weekend, we're taking a break from our usual fare to touch on an asset class we don't often examine in DailyWealth... cryptocurrency. A lot of folks are looking for alternatives to traditional centralized finance. And this year's banking turmoil is just the latest reason why.
It's new ground for many Americans. So if you're interested in moving some money into these assets, it's crucial to understand the ins and outs. That's why Crypto Capital analyst Stephen Wooldridge II is sharing what new crypto investors need to know...
In today's essay, originally from an April 2021 Crypto Capital special report, Stephen explains how to avoid the most common mistakes that crypto traders make... and details his "rules of thumb" for thriving in the crypto space.
Starting out with cryptocurrencies can be nerve-wracking.
First, you need to buy crypto from an exchange you trust. Then, you set up a noncustodial wallet. And once you transfer a coin or token to that wallet, it becomes your responsibility.
This gives you incredible financial freedom. If you keep your funds somewhere centralized, like a bank or stockbroker, can you really say you own those funds? You may only be able to access them during business hours. Transferring your funds can take days. And what if that bank or broker closes or gets hacked?
You have more at stake than just your funds with centralized financial institutions. Your entire identity is kept on their servers. For example, in 2020, some of American Bank Systems' user data was breached and released to the public when it denied a ransom payment to the hackers. This is the hidden danger of centralized financial firms.
With crypto, you can choose to keep it on a centralized exchange. But you also have the freedom to reject centralization... And if you do, your funds and data are entirely in your own hands.
That means you can buy, sell, and send them 24/7 to anyone in the world. And you don't have to worry about a noncustodial wallet shutting down or getting hacked. But it also means there's no one to help you if you give out your private key or lose your password. You're on your own.
I know that sounds scary. But with a few tips, you can make sure your crypto is protected and be on your way to financial freedom.
So let's get started...
Tip No. 1: Keep your private key and recovery phrase secret. A noncustodial wallet gives you complete control over your funds. Some wallets will let you choose a password... Then, they'll give you a private key or a recovery phrase (or a "mnemonic" or "seed" phrase). These keys are backups in case you lose your password.
Some wallets offer a hardware wallet or app that provides these keys with added security. Others will give you a paper wallet (where you print out a public address and private key to hold on to).
Only you should have your backup keys. These keys offer permanent access to your funds. If someone has your backup key, they're in. There's no way to change the keys associated with your wallet, so it's important to keep them private.
Tip No. 2: Don't lose your backup keys. A noncustodial wallet is your responsibility – there's no "I forgot my password" button. So forgetting your password and losing your backup keys means losing access to your funds permanently.
That's why you should write down your private key or recovery phrase on paper and store it somewhere safe (and secret). If your computer or device breaks down, you can always use this paper wallet as your last-ditch resource to recover your funds.
Tip No. 3: Never put your backup keys into a website. There are plenty of fake websites out there. Always make sure the site you're on is spelled correctly and has a certificate. Also, check out the design of the site itself. Does it look off? Search for the company or product on Google and see if any other websites pop up that might be legitimate. If you're ever hesitant about a website, do more research. This will protect you from a majority of phishing attempts.
But the truth is that your keys are extremely sensitive information. You should never type them into a website. Even if you're on a legitimate site, it won't protect you against spyware and malware installed on your computer.
For long-term security and holding, I recommend purchasing a hardware wallet or using a second layer for access, like a supported app or MetaMask. Also, don't hold your entire crypto portfolio in wallets that you access by using your keys.
Tip No. 4: Never accept a wallet from someone else or buy a hardware wallet from a third-party site. If you want to accept a funded wallet from a friend, make sure you transfer the funds immediately to a wallet that you've secured with your own backup keys. Even though it can seem in good faith to give and receive wallets with crypto, it also comes with the risk that the giver has recorded those backup keys for themselves.
Purchasing a wallet from a third-party site has the same risk. The seller could record the backup keys before you buy it. We've heard too many stories of new traders receiving a wallet as a gift or buying a hardware wallet from a third-party site, only to have their funds stolen a few months later. This is a classic scam to trick new traders into buying crypto and then steal it from them.
Tip No. 5: Be wary of any advice you receive from people online. The Internet is full of helpful people ready to assist new crypto traders with questions. But there are just as many, if not more, phishers out to steal funds.
If someone ever asks you to visit a link and enter your backup keys or asks for your keys directly, they're trying to steal your money. Remember, these keys give them complete access to your funds.
If someone tells you that you have to send funds to a specific address to "activate it" – or that if you send crypto to an address, you'll get two or five times that amount sent back to you – they're lying.
Be skeptical of any advice you receive. That way, you'll always be prepared.
Tip No. 6: Check your public address before any transaction. Crypto is riddled with difficult-to-navigate addresses, keys, hashes, and strings. So make sure you're familiar with the addresses related to your funds.
Double- and triple-check your public address, exchange-deposit address, and wallet address each time you use them. You only have one chance to get the right one.
One wrong character will mean sending your crypto to someone else's wallet. That's why we always recommend sending a small test transaction first.
Tip No. 7: Always double-check your transactions. Sometimes, you have to quickly jump on a trade. But it's important to make sure you're always sending the transaction you want to send. That's where the "GATE" system comes in:
Gas: Is there a transaction fee (a "gas price") involved? And is it fair compared with current gas rates?
Address: Is the receiving address spelled correctly?
Test: Have I already tested this transfer with a smaller test transaction?
Events: Does the event (swap, stake, regular transfer, or decentralized application interaction) of the transaction look correct?
Once you've answered all the questions above, you're ready to make your transaction.
Tip No. 8: Avoid "pump and dump" groups. When a large group schedules a massive pump and dump, it can seem like a great idea to join in. That's where it goes wrong.
A pump-and-dump group is where thousands of people rally together to buy a crypto, which makes its price soar. After its price reaches a certain point, the entire group sells the crypto in an attempt to profit on the rally.
But these groups are usually run by people who are already heavily invested in the crypto being offered. And they usually suggest cryptos that are easy to buy into but hard to sell. So the price plummets before many investors can get out.
For example, in March 2021, a pump-and-dump group with 621,000 Twitter followers decided to buy PIVX (PIVX). In the end, $112 million in bitcoin (BTC) was bought and sold for PIVX... and many participants lost a significant amount of their funds.
Tip No. 9: Don't believe the hype. Just because something is trending on Twitter or Reddit doesn't mean it's a good investment with an experienced team and realistic goals.
A hyped crypto is like a volcano. It builds pressure until it explodes and destroys everything around it. Even if it explodes multiple times, a scam coin is still a scam coin. One of the best examples of a scam coin is BitConnect, which conned $2.5 billion to $3.5 billion from 1.5 million hopeful crypto holders.
In short, hyped coins are usually paid to be hyped, when that money would have been better spent improving the technology of the crypto itself. We're always cautious of cryptos we've never heard of before suddenly taking off in popularity.
Tip No. 10: Keep track of your investments. In the crypto world, things are always moving. Tokens are becoming coins, coins are becoming tokens, and new blockchains are always popping up.
It's important to keep track of your cryptos because one change or missed deadline could make your investment worthless.
EOS (EOS) is a good example of this. In 2018, EOS migrated its ERC-20 token to the EOS blockchain. ERC-20 version token holders had to convert their tokens to preserve their value. But not everyone did... There are still more than 3 million EOS tokens that failed to convert and now are essentially worthless. EOS offers a fallback method for recovery, but it's not available to everyone.
The transition from centralized banking to a decentralized financial landscape may seem daunting. In crypto, almost all of your security comes from your own actions. But following our 10 tips will help you invest securely... and get in on the upside ahead.
Stephen Wooldridge II
Editor's note: July could be "the end of U.S. banking" as we know it. That's because very soon, the Federal Reserve will launch a new instant-money platform called "FedNow"...
It's a change that will affect every American with a bank account, whether or not you own any cryptocurrencies today. And according to Stephen's colleague – and our No. 1 crypto expert – Eric Wade, this digital upgrade is huge for investors. Here's why it will open a currency-based moneymaking opportunity on a scale we haven't seen in more than 50 years... Click here to learn more.