And How To Avoid Potential Pitfalls
Congratulations, You’ve just entered the crypto space. You’re excited, sweating all over the place (dude get a towel already!) and can’t wait to start spending that hard earned cash on some cryptocurrency that’ll hopefully earn you some anxiety inducing profits and you can finally tell your boss to shove it.
Just hold your horses there for a second. Buying crypto is easy, but there can be pitfalls involved. Do it wrong and you could end up on the losing end of trades. Learn from others and you’ll be on your way to making the right purchases that will set you up for profitable investments.
So let my experience be your shining light on that journey. Here are 7 things you need to know before you buy any cryptocurrency.
- Who’s Behind The Project?
For some projects you’re planning to buy into, you need to have done your research first to make sure you’re buying into a project that is legit and not something that could turn out to be a scam or junk. Generally, most of the coins in the top 100 spot on Coinmarketcap.com are a safe bet as they’ve been around for some time now and have built up trust with communities. If however, you’re not looking to buy into the popular coins and opting more towards finding gems, then you need to be more careful what you invest in.
When I’m looking for a coin to invest in, one of the biggest red flags for me is an anonymous team. If at any point, you see an attractive project and everything looks good except you don’t know who the team is, I would be cautious and take it as a sign that it’s probably better to walk away.
I can hear your screams of “BITCOIN”. True, No one knows who Satoshi Nakamoto is. But chances are if Bitcoin — which has been around since 2009-is a scam, then whoever is behind it would have folded shop and disappeared ages ago. Instead year by year more institutions are becoming interested in it and throwing their money towards it.
In the crypto world, scammers / hackers don’t like to play the long game. Some will steal funds overnight, while others will build projects under the guise of legitimacy only to pull off a rug pull in a matter of months. They’ll create an authentic looking project, reel in investors and even build communities, playing the part for months before they remove liquidity and disappear to the Bahamas overnight.
So why take a chance on a project with an anonymous team? I made that mistake when I invested in Cover Protocol a while back. It was an exciting Insurance project that even had the “Godfather” of Defi Andre Cronje attached to it. Now if there was just one thing to know about Andre it’s that if his name was attached to a project, then it was gold.
But then you had a bumbling, arrogant, anonymous team behind Cover Protocol making one unbelievably bad decision after another. They shortly severed ties with Andre and only God knows why, even though he was the only reason they had any sort of legitimacy to their name in the market. But what was incredibly stupid, is that they broke off with him even before using his celebrity status to catapult their project to its full potential.
What’s worse, is the team had zero understanding of any sort of Marketing. It was now just a bunch of arrogant Devs who treated their community like shit.
Eventually, their project got exploited where a hacker gained access to the Blacksmith farming contract and was able to mint 40 Quintillion Tokens. Keep in mind, this is for a project that only had a supply of around 64,000 tokens and at one point reached the value of $1,700 per token. So, you can only imagine what happened to the price after so many new tokens were minted.
What seemed like a promising project, turned sour overnight. And while the exploit was happening, what was the team doing? They were all “asleep”. Not a single one of them on hand, and no security measures in place to stop the exploit.
The community chat mods knew there was obviously something insidious going on, and yet there were no warning messages or any announcements to deter investors from buying newly minted worthless tokens. What followed was an incapability of the team to compensate the traders who bought the bogus minted tokens. Binance did its best to help out but there was simply too much money that was lost in the process.
As for the other holders who were there from day 1? they had to wait over two months to be compensated with a new version of the token-all this while an amazing lucrative Bull market was passing them by at the time.
People were absolutely incensed. And being masters of empathy and self awareness, what did the team do? They decided to start another project of course. This was while wounds were still fresh and no one had yet received their new tokens.
To cut a long story short, their new project “Ruler” failed and Cover Protocol never recovered. The two main devs (Pumpkin and Alan) decided on the same day that they had mental problems and that they would be stepping down from the project and that their clueless minions would take over and continue their work.
It only took a few weeks later, for the project Director to announce that Cover Protocol would be shutting down. To this day non of the team members faced any judicial consequences even though they had the stink of a scam all over them. And what’s worse is most of them could already be working in new projects and under a new anonymous identity.
Moral of the story? Don’t invest in any project with an anonymous team. Especially devs that name themselves after vegetables.
2. Read Through The Whitepaper
Every project has a Whitepaper. Before considering to buy in and especially if you wanna go in big, make the time to look through it and know exactly what the project is about. The whitepaper needs to give you a clear picture and answer the following questions — What is the purpose of the project? Does it have the potential to be adopted on a large scale? What do the milestones look like? Does it over promise on goals? Is the messaging clear and well written or vague and filled with errors?
There’s a lot you can tell directly and indirectly from a whitepaper. It should give you a clear idea of whether you want to invest in a project or not and yet there’s a lot of traders out there, holding coins in their portfolio who have no idea what they’re all about. It makes me wonder what got them to invest in the first place. I’m guessing Moonboy hype on social media had a lot to do with it.
Additionally, knowing what your project is all about can assist you with addressing misinformation which you may read in public outlets. And if your conviction is strong enough, being an ambassador can help put the project in a positive light and draw others to it which is a big win for your investment. Just remember to do it to provide value to others rather than prioritizing any selfish gain.
3. Don’t Buy High And Sell Low
One of the most puzzling things I continue to see since getting into crypto is how many people out there vehemently refuse to buy coins when prices get decimated. It’s as though they convince themselves that this time, crypto must be dead and that they’d be be fools to lose money in it. Conversely, when prices rally, you’d have to wrestle some traders to stop them from making a mistake and buying coins at ridiculously high prices. So if you’ve ever heard the amusing meme- “Buy high and sell low” you now know who it refers to.
I suppose FOMO and greed is the main culprit for why so many traders irrationally jump into overpriced positions. A coin could start pumping out of control and they rationalize that they can quickly jump in and out and make a nice profit in the process. Except in these situations, someone will always get caught and end up holding the bags when others (who got in way before you) start dumping.
You’re putting yourself in a situation where the payoff isn’t worth the high risk you’re taking. There are two outcomes here, you could get away with a decent profit or get absolutely destroyed and have your money stuck in a price point you won’t be seeing again for a while.
Look at the chart below. When you buy at those peak prices, know that there are thousands of people who have bought at the bottom and just waiting for people like you to cash in and take their profit. Don’t be their bag holder!
The bottom line and reality is that there will always be bag holders. You will always get people who buy at the very top and crypto needs that. That’s how anybody that trades successfully and patiently makes their money. They buy all the way at the bottom and wait for the guys who make it a habit to buy at the top until those same guys eventually learn their lesson. And the cycle just repeats itself but with newer people coming in. But luckily for you, you’re reading this guide, and now know better.
4. How Much Supply Is Too Much?
Supply is one of the main categories I consider when I’m thinking of investing in a coin. I like projects with small Market caps and low supply — the lower the better.
They’re called crypto gems. The majority of the market still hasn’t caught on to them yet. Get in at a low price and you could find yourself with a sweet lucrative return on your investment. However, a low supply doesn’t mean that a coin will be successful, so its up to you to look into the coin’s Tokenomic aspects and gauge the potential of whether your coin could be adopted on a large scale.
One thing I like to go through is the current circulating supply vs. the total supply. It’s worth knowing how many coins are currently being traded in the market and how many are locked up by the team.
In the above image you can see how much AXS is currently circulating in the market, while you have a total supply of 270,000,000. This means that there are 186,943,813 locked up by the team. Which is significant enough to effect the current price negatively if the team decided to unlock a specific amount and sell it in the market at one time without the communities’ consent.
It’s not to say that everyone would do that. A lot of teams are transparent in their whitepaper about when locked coins would find their way into circulation. Some locked coins are even used as staking incentives to get people to invest in the project. The only problem is that if the demand does not grow with the newly released supply, you get a coin that decreases in value and which could remain underpriced until there is more demand to offset the new coins.
I also wouldn’t put it past some shady teams to take advantage of growing prices and dump a whole lot of locked coins on the market overnight for a payoff.
For investors, charts could also be misleading when you’re looking at previous ATH points. For example, Axie Infinity previously reached an all time high price of $158.54. Let’s assume demand grew so much that it managed to reach that price with the above current circulating supply. But shortly after, the team eventually releases an additional 100,000,000 coins on the market and the price takes a hit. Unless new demand continues to grow, expect it to be a challenge to reach that ATH price again.
And that is one of the main reasons why I steer clear of projects where the locked supply is much bigger than what is currently being circulated. I just don’t trust teams enough to effectively manage the locked supply well enough vs. growing demand.
5. Let The Charts Whisper To You
You don’t have to be a TA wizard to be a successful trader. But, at the very least you should be able to look at a chart and know what’s happening on a basic level.
A chart can guide you and give you a good idea of when it’s an optimal time to make a purchase or when to sell.
When I’m working out my ROI, I consider a sell price target that is close to the last ATH price. Sure, it can go way past that, but I prefer planning targets and taking profits based on what has already happened instead of a number in the future that may or may not materialize.
It can also give you an indication of a project’s health. Whether there is potential for growth, or decline. Charts are your friends, let them guide you!
This is what a healthy project looks like on a chart:
And this is what death looks like (Complete opposite of the above chart):
6. Stay Away From Toxic Communities
Whenever you’re investing in a new project always go and have a look at the project’s Twitter feed. What do the comments look like? If you have an overwhelming amount of negative comments, you may want to stay clear.
And this isn’t referring to a few posts where you have one or two clowns complaining that the project must be a scam because the price is low. What a toxic community looks like is an onslaught of abuse aimed at the project team. If you want an example of this, go have a look at Saitama’s Twitter feed. Every single tweet has a lot of people complaining about not having received their V2 coins months after the team was supposed to have replaced their current V1 coins.
The drama occurred when the Saitama team informed their community that they were going to automatically exchange everyone’s coins and that they didn’t need to do anything. What ended up happening, was their community is so large that they were not able to manage it properly and so many were left months later still waiting to receive their new coins.
The team has since communicated that those still waiting would be able to facilitate the exchange themselves through a few steps they could undertake. But a lot of community members may have missed the message or simply don’t know how to follow instructions. And so, to this day, you have members who continue to troll Saitama with abusive messages.
If I was an investor in the project, simply put, I wouldn’t be happy about that. A lot of potential buyers do visit these feeds for information and if they see countless messages calling the project a scam, they don’t invest. That’s not helpful to any current holders who expect their investment to come to fruition when potential investors are turning away from the project.
So when you have a bunch of possible investments lined up, keep in mind that you’re also adopting a community. Make sure that community doesn’t sink your investment.
7. Vary Your Projects And Your Price Entry Points
Never put all your money in a single project. Big no-no! It may work out once, twice, thrice but make it a habit and that’s a one way ticket to eventually getting wiped out.
Rug pulls and hacks do happen more often than you think and all it takes is one bad choice. Put all your money in a single project that turns out to be a scam or gets hacked and you’re done. I can understand why some would see it as a good idea from a strategic point of view. The more money that you put into a coin which happens to 20X or 30X the better the payoff will be which you can then spread on to other projects. It could work out that way. But it’s always better to be safe than sorry!
You may think that you’ve done your research and there’s no way the project you’ve invested in is a scam. And that may be so. But hacks and exploits happen and you better believe they can decimate projects.
All you have to do is google a list of coins hacked in 2021 and you’ll get quite the comprehensive list. Badger Dao, Paid Network, Cream Finance (How many times has it been now?), Compound Finance and Poly Network, all losing millions of Dollars. And there’s many more.
Sadly, many of these projects have still not fully recovered from being exploited. People lose confidence and mostly just move on to other projects. Those who are left holding, often wonder if the price will ever recover and if they’ll ever see those previous highs again.
If you’ve been in the crypto space long enough. You will get caught. One of the projects you’ve invested in will get exploited. So ask yourself, do you really want it to be the only one you’re invested in and have to wait for a recovery which may or may not come, or would you rather have spread your money to a number of different projects which allow you to recover any short term losses which the hacked project was responsible for? The answer is easy.
It’s never a good idea to put everything into a single project. Don’t do it. Ever.
But what about price?
Similarly, don’t get into the habit of buying at a single price point. It’s just not smart. The only time this would work out is if you’re so sure that the price is close to the bottom and you won’t be seeing it again for a long time, then that’s ok.
Consider this, Ethereum costs $1,600. You have $10,000 to splash on it and so you go ahead and spend everything you have at that price point and you end up with 6.25 ETH. Its price then goes down to $1,400 and since you threw all your money at a single entry point, you can’t buy anymore!
This is where Dollar cost averaging is a safer option. You could have allocated 10–15 percent of your budget to a starting price point, and then used 5–10 percent to buy more ETH at every significant price drop until your whole budget has been spent. You’d probably end up with more than 6.25 ETH and have more options to maneuver. Dollar cost averaging helps you to reduce risk of getting stuck at a single price point and gives you more flexibility in terms of buying and selling. It’s a buying strategy that works well even for people that have no idea about TA. So learn to use it well!
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If you have any questions or need advice, feel free to get in touch!
Disclaimer: I am not a financial advisor. The above is based on strategies which I have developed as a trader through years of trial and error. You are free to use those strategies as you wish at your own discretion, however, I am not responsible for any losses you may incur as a result.