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Ten Things You Should Know Before Buying Your First Cryptocurrency

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If you just started paying attention to cryptocurrency and are wondering whether to invest, here are 10 things you need to know before buying anything.

Even if you’re an old pro, you probably know someone who’s curious because they heard on TV or at the bar that the price of some coin is surging and they can get rich quickly trading it. Please share this post with him or her.  

1. Don’t put in more than you can afford to lose

Crypto is riskier than many other investments. Nothing is guaranteed other than volatility. What’s more, it’s unregulated in most cases. There is no FDIC insurance for this stuff, nor is there a buyer of last resort. The prices of crypto coins swing wildly from minute to minute. While the market is basking in the glow of bull run, it has endured painful and protracted corrections and almost certainly will again.

Danger varies in degree. Bitcoin, the original cryptocurrency, has been around for more than a decade and it’s significantly less likely to disappear than most other coins. But it’s not free of risk either.

Hence, don’t bet the proverbial farm, or your life savings, on any coin.

2. Research thoroughly

Before you invest a significant amount of money in any digital currency, spend hours upon hours researching the technology so you understand the value proposition and the risks. (“Someone else will buy it from you for a higher price” is not a value proposition.)

Read everything you can find on the topic. (CoinDesk’s Learn section is a fine place to start, and our Research Hub can be your next stop.) Lurk on community forums and developer mailing lists. Listen to podcasts. Borrow books from the library, not only about digital currency but related fields like cryptography, game theory and economics. Read CoinDesk and even some of our competitors.

Go to local meetups, if your area is no longer on COVID-19 lockdown. Ask lots of questions. If you don’t understand what you’re hearing, don’t be afraid to ask someone to explain. If it is still not making sense, don’t assume that’s on you; people could just be talking gobbledygook. The sincere ones will take the time to help, but even then be wary of people “talking their book” (telling you to buy what they own so the price goes up).

And even if you’re convinced, seek out skeptics (there is no shortage of them) and consider their arguments as well. Remember John Stuart Mill: “He who knows only his own side of the case knows little of that.”

Once you think you’ve researched everything there is to know, do even more work. You’re probably not done yet.

3. Resist “fear of missing out”

If the only reason you’re investing in something is to avoid missing out, the only thing you won’t miss out on is losing everything.

Fear of missing out (FOMO) is a sure way to destroy whatever wealth you may have accumulated over the years. The problem is that it’s a gut reaction to something that should be researched first. Trading based on your gut will quickly lead to an upset stomach.

Know what you’re buying. Really know it. Going on a trading app and seeing a currency is up 30% or so over the past 24 hours isn’t research. It could be you’re the unlucky sap being sold a falling cryptocurrency.

Every coin has pumpers (shameless promoters), even bitcoin. Don’t succumb to peer pressure. This isn’t high school. Think for yourself and evaluate the case for an investment on the merits.

Research. Then research again.

4. If it sounds too good to be true, it probably is

Much like Wall Street, the U.S. Congress or the American Bar Association, crypto is rife with charlatans. There are more than enough people promising their project will be the one to overtake bitcoin. But is it? There’s only one way to find out: Research.

Buyer beware, but also borrower beware. Some crypto exchanges offer more than 100x leverage, meaning you can borrow up to 99% of the cost of an investment. This will juice your profits if a coin goes up in value, but if it goes the other way you could quickly be wiped out.

5. Don’t trust, verify

Scammers abound in this market. Just this past weekend, some rascals on Twitter took advantage of Elon Musk’s appearance on television’s “Saturday Night Live” to defraud people out of $100,000 worth of various cryptos with a bogus “giveaway.” Impersonating the comedy show’s Twitter account, the miscreants instructed their victims to send small amounts of crypto to verify their addresses. If they did so they would get 10 times the amount back.

That too-good-to-be-true proposition was a red flag. Read thisthis and this for more telltale signs.

6. Beware of ‘unit bias’

Just because a coin is trading around $1 does not mean it’s “cheaper” than bitcoin at $58,000. Not all coins are created equal.

There are literally thousands of cryptocurrencies, some of which seek to emulate bitcoin and some of which try to solve other issues. They all have varying levels of developer support and decentralization.

Determining the value of a coin means asking how and why was the coin created. What is its supposed utility? Who is working on it? How big is the developer community? How active is the repository on GitHub, where updates to the open-source software are usually logged? Like a building, a codebase requires maintenance, and neglect can leave a structure unsound.

Crucially, what is the coin’s security model – proof-of-workproof-of-stake or something else? If it’s the former, how does the hashrate compare to other PoW coins? If you don’t know what these terms mean, you’re not ready to invest.

7. Not your keys, not your coins

Cryptocurrency is a bearer asset like cash or jewelry, meaning the holder is presumed to be the rightful owner. Once it’s lost or stolen it’s gone.

That is why advanced users will advise you not to entrust the cryptographic keys to a digital currency wallet to a third party, such as an exchange, because these firms are largely unregulated in many places and may be subject to hacks or exit scams (absconding with clients’ money).

Decentralized finance (DeFi) platforms have fallen prey to numerous high-profile exploits over the past 10 months, and centralized platforms like Binance have been subject to their fair share as well.

However, safeguarding keys yourself, on a hardware device or even a piece of paper with the string of numbers and letters written on it, can be a nerve-racking business, and it’s easy to mess up. This is why even some experienced investors prefer to use third-party custodians.

Crypto is all about trade-offs. Do you trust yourself not to lose that piece of paper or forget the “seed phrase” (a password for a key that unlocks your crypto)? If not, you have to be comfortable with someone else storing your digital valuables, and history gives you every reason not to.

(To mitigate the risks, there is something called a multi-signature wallet. These can be configured so that, for example, both Bob and Alice must sign off on a transaction to release funds from a wallet, or either Bob or Alice can do so, or three of Bob and Carol and Ted and Alice, and so on. But yes, it’s complicated.)

Aside from exploits, exchanges may block you from withdrawing your funds at any time for a variety of reasons ranging from solvency issues to legal trouble. Even beyond that, some exchanges just don’t have the infrastructure necessary to remain up at all times – Coinbase and Robinhood, for example, often go down during periods of market volatility. If you aren’t running your own wallet, you can’t guarantee you have control over your coins.

That said, there are various reasons why you might want to use an exchange, so it’s important to check the user agreements and make sure you’re protected against different eventualities.

8. You can buy a fraction of a bitcoin (and most other cryptos)

You don’t need to buy a whole coin. Bitcoin, for example, is divisible to the eighth decimal. So if you’re curious about how this stuff works, you can purchase as little as $10 worth and just play around with it.

As billionaire Mark Cuban recently said on television of buying small amounts of dogecoin, “it’s a whole lot better than a lottery ticket.” Unfortunately, he also encouraged viewers to spend doge on merchandise without mentioning the tax implications (see below).

9. Understand the tax consequences

This is especially important in the U.S., for several reasons. First, the Internal Revenue Service (IRS) considers crypto property, not currency, for tax purposes. The upshot is if you buy a coin for $1 and it doubles in value and you spend that extra dollar to buy so much as a pack of chewing gum, you are required to report that capital gain and pay tax on it. There is no “de minimis exemption,” despite the crypto industry’s lobbying efforts.

Also, centralized exchanges regularly send account information to the IRS. Sure, crypto isn’t as regulated as stocks or banks. However, the federal government is running a massive deficit and it won’t think twice about sending in folks with mirrored aviator glasses to visit you to ask about your crypto trades.

10. Buy using dollar cost averaging and don’t obsess about price

Go outside. Get some fresh air, exercise and sunshine. Spend time with your family. You can do all that AND invest in crypto.

The markets will fluctuate from day to day, hour to hour, minute to minute, but any crypto worth a damn, any investment of any kind worth a damn, is a long-term bet. If you want a dopamine hit, go for a run or watch an action movie.

What’s the best way to invest and not obsess? It’s using dollar cost averaging (DCA). Buy a set dollar amount of whatever crypto you like at regular intervals (Daily? Weekly? Monthly? Annually? You pick.) and don’t look at it.

If you have a long-term view, you’re not going to be pressured to sell or up your position based on short-term movements if you use DCA.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Bitcoin

Bitcoin ‘Whales Are Re-Entering As Risk Appetite Returns’, Says Stack Funds Research

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On Wednesday, Lennard Neo, Head Of Research at Stack Funds, a Singapore-based crypto-focused fund management company, explained why they believe that “Bitcoin is very close to the bottom.

His comments about Bitcoin were delivered in a research note (titled: “Strong support observed as Bitcoins get scooped up at $30,000”), which was published yesterday.

The research analyst wrote:

“We have observed a meltdown in long liquidations (7D MA) over the past few weeks. This coupled with the Leverage ratio (grey line) falling to a 2-year low after dipping below that of March 2020 levels, provides evidence that traders are more cautious in taking positions.

“Inflows for Bitcoin have skewed to spot accumulation as opposed to speculation, as investors match their expectations towards a longer-term horizon – signaling less propensity to sell.

“In the face of the recent sell-off, we also see significant support levels around the $30,000 handle, with substantial bids coming in to fill up the offers. The strength comes on the back of Microstrategy accumulating more Bitcoins, and we have noticed that Whales are also re-entering the market as risk appetite returns. Short squeeze hunters have also begun waning away in the near term as markets continue to establish ground on a consolidation phase.“

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Bitcoin

Canaan Begins Its Own Bitcoin Mining Operations in Kazakhstan

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Bitcoin mining machines manufacturer Canaan has started mining bitcoin in Kazakhstan, following the crackdown on bitcoin mining in China.

Canaan said its AvalonMiner units are already in operation in Kazakhstan. When asked how many units and of which model has been deployed, a Canaan spokesperson declined to comment on specifics but said “a first batch of small-scale mining machines” have been deployed to start with.

Canaan foresees “a gradual ramp-up to full operational functionality over time,” the spokesperson added. The company has partnered with local mining companies in Kazakhstan for the initiative, they said.

China-based Canaan has been preparing to launch a crypto mining business in Kazakhstan for some time now. Earlier this month, the Nasdaq-listed company opened its first overseas after-sales service center in Kazakhstan as its global sales continue to increase.

Kazakhstan appears to be growing in popularity for bitcoin mining after China moved to shut down local bitcoin mining farms last month. Kazakhstan is close to China and has one of the cheapest electricity rates in the world.

Earlier this week, China-based BIT Mining, formerly known as 500.com, also shipped some of its bitcoin mining equipment to Kazakhstan. The company is set to send more machines to the country next month.

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Cryptocurrency

Andreessen Horowitz Officially Launches New $2.2B Crypto Venture Fund

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Andreessen Horowitz /(a16z)- Investors King

Andreessen Horowitz (a16z) — prominent venture capital fund led by Ben Horowitz and Marc Andreessen — announced Thursday the close of its third crypto venture fund, a $2.2 billion fund that the firm says is the largest of its kind.

The new “Crypto Fund III” will be co-led by Chris Dixon and Katie Haun.

“The largest crypto fund ever raised to date, Crypto Fund III is a validating moment for the ecosystem and another sign that crypto becoming an ever more mainstream part of our financial infrastructure,” the firm said in a press release.

Rumors of Andreessen Horowitz (also known as a16z) raising a mega-fund have appeared in various reports in recent months. The Financial Times reported in April that the California-based investment firm would be raising $1 billion for a crypto fund. In late May, tech blogger Eric Newcomer wrote that the firm was raising $2 billion.

A source familiar with the raise now told The Block that interest came mostly from limited partners in the firm’s previous crypto funds, which have seen large returns. a16z netted more than $440 million from selling Coinbase stock soon after the exchange made its public markets debut on Nasdaq, according to CoinDesk.

a16z’s mandate in crypto has been broad, ranging from decentralized finance (DeFi) to bitcoin applications to so-called Web 3, or a decentralized version of the internet. The firm’s portfolio includes Dapper Labs, Celo, Uniswap, and Near.

“This fund allows us to find the next generation of visionary crypto founders, and invest in the most exciting areas of crypto,” Dixon and Haun wrote in a blog post. “We invest in all stages, from early seed-stage projects to fully developed later-stage networks.”

In addition to securing more than $2 billion to invest in crypto, a16z’s crypto business has been hiring aggressively. It has made a number of key hires including Anthony Albanese, who joined the firm last year from the New York Stock Exchange. Albanese is now being promoted to chief operating officer of a16z crypto.

The firm also hired Bill Hinman, a former director at the Securities and Exchange Commission, who once said ether (ETH) is not a security, and Rachael Horowitz, a veteran Silicon Vally communications strategist who previously was the top communicator at Coinbase, also recently joined. Horowitz has also held positions at Twitter, Google, and Facebook.

Additional new hires include policymaker Tomicah Tilleman, who is joining the firm as global head of policy after serving as a senior advisor to President Joe Biden.

“As with any new computing movement, crypto has endured a variety of challenges and misconceptions,” Dixon and Haun said. “That’s why we are also bringing together heavy-hitters across several functions to help translate “crypto” to the mainstream.”

The announcement of Crypto Fund III follows a flurry of recent activity in crypto venture investing. Despite the slump in coin prices, investors have been raising large sums of cash to pour into new crypto startups.

Framework Ventures recently announced a $100 million new fund to invest in DeFi. Blockchain Capital, meanwhile, recently announced a new $300 million fund with backing from tech giants PayPal and Visa.

Data from The Block shows investors poured more than $8.8 billion into startups during 2021, compared with 3.07 billion in all of 2020.

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