I looked at the “Buy Bitcoin” button and paused, was I ready to do it? had I read enough articles explaining what is blockchain? 2017 had just closed after an all-time high for cryptocurrencies, and according to many enthusiasts, it was just the beginning. I felt like I was missing out, so I pushed the button and sat back. I felt confident, but in reality, I had no idea what I was doing.
I passively consumed news about Bitcoin for years, but I never went deep enough to properly understand the technology behind it and its potential. Even though I followed the ultimate rule of “investing only what you can afford losing”, the truth is that I only began to comprehend blockchain technology after I already got my feet wet. I started losing money shortly after my first order completed, these are the 4 lessons I learned since then.
1. A big Bitcoin dive can drag the rest of the crypto market with it
There is so much speculation around cryptocurrencies and so many people investing in them without having a clue, that a moment of panic can snowball into a sudden market crash. A Bitcoin crash can affect many investors’ confidence in other cryptocurrencies (or altcoins), dragging their price down as well.
Many altcoins are variants of Bitcoin with small code differences, making their prices change practically in parallel to Bitcoin’s.
2. Understand a cryptocurrency before you invest in it
Each cryptocurrency has specific implementation details or functions that define their value proposition. Understanding these differences is critical to ensure you invest wisely and don’t get involved in a scam.
For example, Ethereum is one of the most popular altcoins at the moment, it’s staleful thanks to its smart contracts capability, and can act as a platform for decentralized apps (or DApps) usually focused on money, voting or governance systems. Ethereum is starting to match Bitcoin’s price movements, but at a different scale:
Other altcoins also became popular, but for very different reasons: Confido, for example, raised nearly $375K in its initial offering (also known as ICO) and then disappeared with the money. Get to know the community behind a cryptocurrency before you decide to trust them.
3. Centralized exchanges add another layer of risk
Coinbase is one of the most popular currency exchanges nowadays. Different exchanges may have different fees, and different levels of convenience: Coinbase is easy to use from an smartphone, but GDAX (owned by Coinbase) has cheaper fees and a more detailed interface to trade cryptocurrencies.
However, centralized exchanges in a loosely regulated area means added risk, and you need to be prepared for the worst. Bad management and fraud can cause devastating collapses like Mt.Gox’s in 2014. Technical errors can also have a big impact at a smaller scale: this past week, Coinbase users started reporting ghost charges on their accounts, draining bank accounts and incurring in overdraft fees. Outages are also a risk driver: Coinbase and GDAX both had outages last summer that triggered a wave of panic selling.
Back in 2014, peer-to-peer exchanges were a promising solution, but they never got enough traction, so choose your exchange wisely. When your investment cannot be insured, remember to only invest what you can lose.
4. Blockchain has many potential applications that can make the world a better place
Blockchain technology can be applied to any scenario where the adjectives decentralized, open, neutral, borderless and censorship-resistant are part of the success criteria.
Here are some examples: immediately transferring money to someone without having the funds temporarily held by an intermediary, any scenario where the middleman is part of the problem, securing your online identity as easily as you secure your passport information in the real world, storing ownership records in a permanently notarized digital form, or even digital voting if you combine a few of the previous scenarios.
Blockchain will continue maturing and evolving for a while before we see the first mainstream application reach critical mass. It all sounds exciting and new, but before you jump into the pool, read as much as you can and learn from others’ mistakes. You might end up creating a little fortune instead of a big hole in your pocket.
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Originally published at geekonrecord.com on February 19, 2018.