I have an important question for you…
Can you ignore the “noise” around China banning crypto (again) for a moment? And can you ignore the volatility in cryptocurrencies right now, even as bitcoin’s price fell nearly 50% in two weeks?
Hopefully you can.
Instead of worrying about the risks you can’t control, you should focus on the ones you can control.
And the biggest risk for crypto investors comes from pump-and-dump scams.
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This isn’t just about crypto. It’s a great teachable moment for investing in general.
Whether we’re talking about stocks or cryptocurrencies, there will always be bad players out there. But a few simple tips will help you avoid scams and identify the best risk/reward opportunities…
There are literally thousands of cryptocurrencies for investors to invest in. Coinmarketcap.com lists over 5,000 different coins.
Does that mean you have thousands and thousands of opportunities?
Cryptocurrencies are a wide-ranging group. The list is made up of well-established market leaders like bitcoin and ethereum. These cryptos are the cornerstones of the entire crypto industry. Ethereum, for example, includes an entire ecosystem that enables other cryptocurrencies and applications to run.
The crypto space also includes “meme coins” and similar speculative situations. I discussed this topic a couple weeks ago when I wrote about the boom in dogecoin.
Many cryptocurrencies aren’t companies at all. There’s no business plan, no office building, no product. The only thing they sell is… coins.
Keep in mind, regulations are minimal to nonexistent for much of the crypto space. Smaller crypto projects don’t need to disclose anything to investors or regulators before listing on some exchanges. As a result, crypto traders and “get rich quick” speculators can find themselves playing a game of musical chairs with their money.
Why are there so many shady coins? The main reason is they’re easy to make. A recent Bloomberg article explained how easy the process is. And once you create a new crypto, you can get it trading on an exchange almost instantly.
In the article, two individuals in Singapore created a cryptocurrency called WART… then got it trading on a decentralized exchange called PancakeSwap in less than 10 minutes.
Using basic software, anyone can create a coin and get it on an exchange. While this isn’t inherently “bad” by itself, it attracts a lot of shady players. And it can lead to dangerous speculation… and big losses for investors.
You’ve probably heard the term “pump and dump” before. It’s a classic scheme where an individual or group of people “pump” the price of an asset to make a lot of money for themselves. They’ll build a massive position beforehand, which isn’t disclosed (or, at least, isn’t properly disclosed) to the public.
Next, the group will use social media and financial websites to generate hype for the stock or coin. For example, Elon Musk’s tweets instantly go to his 50 million-plus followers. With a big enough following, a person (or group) can get a coin’s price to skyrocket.
After the pump, the original owners then “dump” their stake by selling to investors/speculators caught up in the euphoria. These folks see the rising price and think they’ll get rich quickly. It’s an age-old story that rarely ends well.
What can investors learn from this?
Here are a few simple rules to save you a lot of money and stress…
For one, don’t blindly follow anyone into an investment. If your favorite celebrity pitches an idea, investigate it and make sure it’s suitable before you consider buying it. Ask a few simple questions like, “What does this company do?” and “How will I make money on this investment?”
If you decide to invest/speculate, make sure you use proper positioning sizes. Don’t invest more than you’re willing to lose. And if you make a massive return, sell at least some of it and play on house money in case it crashes. A simple tip is to sell half your original investment once you’re up 100%. This locks in your initial investment and allows you to play with “house money.”
I know this advice sounds elementary. But investing isn’t rocket science. In fact, it shouldn’t be.
The best approach is to keep it simple.
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