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Crypto investing is complex, with nuances that differ from traditional financial rules
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Stephanie Hughes Investors who are just starting to enter the digital asset space should be holding established players rather than looking for quick wins on the latest dog-themed coin, according to an expert. Photo by Dado Ruvic / Reuters Illustration Files Content of the article
Earlier this year, U.S. website CoinDesk created a crypto literacy test with basic questions about bitcoin, blockchain, and non-fungible tokens (NFTs). Out of the thousands of people who responded to the online survey, according to the website, about 98% failed. Respondents had to score over 60 percent to pass the test.
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Nine in 10 were unaware of bitcoin’s limited supply cap, believing the cryptocurrency to have unlimited supply (bitcoin actually has a $ 21 million supply cap). The quiz asked other questions like what crypto typo is secured by an underlying asset such as fiat currencies or commodities (the answer is stablecoins) and what is the smallest unit of bitcoin (answer: a satoshi, named after the pseudonymous creator of bitcoin, Satoshi Nakamoto).
Despite the growing popularity of the industry, the test showed that crypto literacy did not keep up, which experts attribute in part to the complexity of the industry and its enthusiastic, albeit often inexperienced, investor base.
“This space seems to be attracting… new young investors who are not interested, for whatever reason, in traditional stocks; and when they step into that space, they’re not interested in established players, ”said Brian Mosoff, CEO of Ether Capital, a crypto investment firm.
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“They just want to go find the next shiny new thing, and with that next shiny new thing, of course, carries a significantly higher risk. It doesn’t mean that they can’t have a great reward, but they have to understand the risk.
They just want to go get the next shiny new thing, and with that next shiny new thing, of course, carries a significantly higher risk.
Brian mosoff
The Squid Coin scam that hit the headlines in November demonstrated how vigilant investors need to be in this market. The play was based on the popular Korean drama “Squid Game” and investors piled up to lose everything as the crooks won US $ 3.3 million in an apparent “carpet draw”.
“The squid, for example, was surrounded by several warning flags,” Mosoff told the Financial Post. “You had a group of anonymous developers deploying the code and ramping it up; you did not know in which jurisdiction they were; you didn’t know if it was regulated… and how it was going to get started. While it was backed by venture capitalists, there was no seal of approval for any type of institution or financial body. “
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Mosoff added that investors need to pause and ask themselves critical questions about the long-term sustainability of a coin issuer, what it offers to the decentralized financial community, and what separates it from established players, such as bitcoin.
Although the author of bitcoin is anonymous, Mosoff maintains that his confidence lies in the underlying technology, and that he did not attempt to sell tokens to early investors in exchange for money in an “IOU” format. “.
“Bitcoin was a proposed structure,” Mosoff said. “That said, you can participate in the system and its governance in validating this network, and whoever was behind it, the thing to trust was math, the thing to trust was blockchain.”
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Content of the article physical imitations of bitcoin cryptocurrency banknotes and coins. Photo by Ozan Kose / AFP via Getty Images
This is not to say that there is no room in an investor’s portfolio for alternative crypto assets such as memecoins. However, investors who are just starting to enter the digital asset space should be holding established players rather than looking for quick wins on the latest dog-themed coin, he said.
“I think a lot of new investors in the space feel like they’ve missed the boat on Bitcoin and Ethereum… and they expect the same kind of returns and quick get-rich-quick stories from someone as they know, or a friend of a friend, and maybe they can find new strengths, ”Mosoff said.
“The problem is, I think a lot of these investors don’t do real research and come up with a thesis focusing on why their entry point is going to have the same kind of results.”
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While some of the traditional rules of finance still apply in the crypto space, such as “don’t invest more than what you’re willing to lose”, “ask yourself how you want to balance your portfolio” and “ do your research on an asset, ”Mosoff said that there are nuances in the crypto market that can separate the two. Details such as forks (a change or division of the underlying blockchain network of the asset), crypto clones, and competitors, can all complicate what newbie investors think they are investing their money in.
Investors should also ask themselves a few questions about the specific assets they are considering purchasing. How does the specific part work? Who owns and operates the asset? What is their track record? Is the coin supply infinite or fixed? Where are the reserves invested?
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Before even stepping in, certified financial planner and founder of MOOLA Financial Coaches, Graham Plumb, said investors should also make sure they’re following some traditional financial rules: They should assess their own cash flow to understand the risk they can take and have a tampon. three to six months of emergency fund savings.
With the basics covered, Plumb said crypto may be another way for some investors to build wealth, but only if it makes sense for their strategy and financial goals.
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“I think crypto is another tool, it’s another bucket where I could invest money,” Plumb told the Financial Post, describing the different levels of investment baskets, from low cash savings. risk to higher risk crypto assets.
“So you want to chat with an investment planner about how much cryptocurrency risk (is) and what percentage I should have in my portfolio.”
Plumb added that he views crypto as a positive for the financial world, making people more attentive to investing and growing their finances.
“It’s related to more people who are more interested in finance now than… in the past,” Plumb said. “I would say the rise of crypto has at least had that positive impact.”
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• Email: [email protected] | Twitter: StephHughes95
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