While watching the Super Bowl, you probably saw some interesting advertisements by cryptocurrency companies like FTX, eToro and Crypto.com, among others, touting crypto to the masses.
Coinbase, for example, aired a 60-second commercial featuring a bouncing QR code. Once scanned, it led to a promotion offering $15 worth of free bitcoin to new users who sign up for its platform. This generated so much buzz that the Coinbase app and site briefly crashed.
FTX titled its commercial “Don’t Miss Out with Larry David,” where David jokingly mocked important inventions, from the wheel to the light bulb. At the end, David also dismisses FTX, and the screen said, “Don’t be like Larry. Don’t miss out on crypto, NFTs, the next big thing.”
Others had similar takes, including eToro. Throughout its commercial, the song “Fly Me to the Moon” played, which was a nod to the crypto community’s belief that crypto prices will soar “to the moon.”
It can be exciting, and for some, there’s a real fear of missing out. But, it’s important to understand the risks of cryptocurrency before buying in.
It may be difficult to take a step back amid the hype, but experts recommend being careful, understanding the risks and taking time to research. They deem cryptocurrency to be a volatile and speculative bet, and in turn, warn to only buy as much as you can afford to lose.
Here’s what to know before investing in cryptocurrency.
Do your research
It’s important to truly understand bitcoin, cryptocurrency or any asset prior to investing.
″’Educate before allocate’ is a phrase that me and my friends are using,” Douglas Boneparth, certified financial planner and president of Bone Fide Wealth, previously told CNBC Make It. Boneparth has invested in bitcoin since 2014.
Cryptocurrencies like bitcoin are decentralized, which means they aren’t controlled by one entity or government, and aren’t backed by a reserve asset.
Bitcoin, the largest cryptocurrency by market value, launched in 2009 with the intent to work as a peer-to-peer financial system. Its blockchain was carefully created with a well-thought-out ecosystem. Bitcoin also has a limited supply, which allows for built-in scarcity by design. Because of that, it’s seen as a store of value by its holders.
But this also contributes to why financial experts see it as more risky than other investments. And altcoins, or other cryptocurrencies aside from bitcoin, may require additional caution due to their differences from something like bitcoin, including their structure, supply and utility. To learn more about altcoins, you can read here.
“Before investing in any cryptocurrency, it’s important to understand what you’re investing in and the associated risks, not just hype around it,” Boneparth said.
Understand the risks
There are many different risks when it comes to investing in cryptocurrency.
Tech risk, for example, is important to consider. Smart contracts, or collections of code that carry out a set of instructions on the blockchain, are essential for most crypto-based projects to run. But if there’s a weakness in the code behind a coin or project, there’s a possibility for hacks or other fraud.
It’s also extremely important that your private keys, the string of letters and numbers similar to a password used to unlock access to cryptocurrency, remain undisclosed to the public. Security should be prioritized if buying cryptocurrency, and there are many wallet options available to secure your investments. There isn’t much regulation or insurance available for cryptocurrency holdings, which makes security measures even more imperative.
Additionally, investors should be aware of bad actors in the space.
Popular scams include sim swapping, where hackers call your phone company and convince them to transfer your phone number to theirs in order to pass the two-factor authentication on your account. Experts also say you should also avoid scanning QR codes or clicking on random links, especially when redeeming seemingly free rewards, and remain skeptical of outside messages.
These risks, along with crypocurrency’s decentralized nature, make it subject to volatility. As quickly as prices rise, they can tumble back down.
Downturns are normal in crypto, said Tyrone Ross, CEO of Onramp Invest, which provides crypto asset management technology for financial advisors. “Folks should know that going in, and if you have the means, you should work with an advisor to guide you through these markets.”
Only spend what you can afford to lose
Again, experts warn to only invest in cryptocurrency what you can afford to lose.
“Bitcoin and other cryptocurrencies are highly volatile so the swings that occur are pretty typical of this asset class,” Anjali Jariwala, certified financial planner, certified public accountant and founder of Fit Advisors, previously said.
There’s even a possibility of losing your entire investment, she said. So, investors should first allocate funds to their “required buckets,” like an emergency or retirement fund, before buying into a riskier asset class like cryptocurrency.
Boneparth agreed: “Be very careful about how much you allocate and understanding what you can tolerate, because if 80% of your net worth is tied to bitcoin, and it goes down 30%, that’s rough.”
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