Nearly six in ten Americans are invested in the stock market, but only about one in ten have bought crypto or NFTs. The reason, according to a recent Natixis Investment Managers survey, is that two-thirds of “fund selectors” (i.e. “gatekeepers”) are telling their clients that crypto is not safe. Their reasoning? Not enough transparency, and too much regulatory uncertainty.
Of course, no one knows exactly what the government will (or won’t do) in the future, though it seems highly unlikely that the United States will follow China’s lead and outlaw crypto altogether. As for transparency, blockchain-based currencies are actually superior to other forms of investments. They may not produce audited financial statements, like public companies do, but every crypto translation is encrypted, verified by an entire community, and posted on a shared ledger that’s visible to all.
The risks are scams like “rug pulls,” where tokens are pre-sold and never minted, and classic hacks, which are typically just classic “phishing.” In other words, the bad guys get legitimate keys in an illegitimate way, then they take your loot.
True, there have been some systemic failures, but these typically happen to newer projects and decentralized autonomous organizations (DAOs) that rushed to market without proper testing. The fact is that you can safely invest in cryptocurrency right now, though there are some rules to keep in mind. Mark Fidelman, founder of SmartBlocks, gives us his five-step process for safely investing in cryptocurrency.
1. Know the risks
Investing in crypto is no different than investing in stocks or real estate — or any other asset class. You must do your due diligence and understand the token as well as market risks, i.e. the tokenomics. Go to Youtube, search the token name, and listen to what people are saying about the project. This will help you understand the upside and downside to investing in that specific token.
2. Know the Team
You may think of crypto in terms of “markets,” but cryptocurrencies are generally minted, bought, and sold within “communities” or “projects.” If you’re planning on trading, then you’ll want to know as much as possible about the community you’ll be trading with — not only its members and leaders, but also its trading volume and float, both of which will determine the liquidity of your digital assets. Don’t be afraid to ask questions: Who are the people running the project? Do they have a good or bad reputation? Do you have mutual acquaintances that you can use for references?
Keep in mind that what will make your crypto become more valuable is most likely the growth of the community after you buy, not the growth of the underlying asset, or even its scarcity. There is safety in numbers, as long as those numbers are going in the right direction: up. Think popular communities like Bored Ape Yacht Club, Ethereum, Bitcoin, and NBA TopShot. Legs matter.
3. Start Small
Because cryptocurrency values can swing wildly, only invest a tiny fraction of your funds until you understand how the token works. If you were investing in the stock market, you wouldn’t throw all your eggs into a single basket and hope for the best. In this regard, crypto is no different.
4. Be Nimble
Understand when you’ll get out of the token if it isn’t performing well, or if it has appreciated and you need to take gains. Establish your boundaries up front and follow them. Not everyone uses circuit-breakers for stocks, but they are a must in crypto.
5. Research Constantly
The first rule of buying anything is to know the seller. Every financial transaction is based on trust, and buying crypto is no exception. Once again, you should do your own research by visiting YouTube, subscribing to Google Alerts, and becoming a presence on crypto forums and chat rooms. You should be able to get beyond the hype and find the legitimate platforms very quickly.
Because the government does not regulate crypto, there are no registered sellers, but the Securities and Exchange Commission has approved several crypto-based ETFs. Another option may be to work with larger platforms like Coinbase and Binance, which have stood the test of time, albeit not decades — not yet, anyway.
Once you understand the community and the rhythm of the token, you’ll know when your investment strategy may need to change.