If you’re looking to make a quick buck on the volatile and rapidly-growing cryptocurrency market, it may be wise to step back and learn a bit first.
While the market is a good place to make quick profits, the volatility of cryptocurrencies makes any investment a risky one – especially if you are investing in smaller coins.
This, coupled with the complex technology behind cryptocurrencies and what makes each coin unique, means it is not a foolproof path to riches.
While the success stories of Bitcoin and Ethereum investors continually encourage fresh investment into cryptocurrencies, the volatility of the market means you can lose a significant portion of your investment overnight.
This was demonstrated recently when the prices of almost all major cryptocurrencies dropped by around 30% in less than a week. This followed news of a cryptocurrency crackdown in China.
Blockchain expert Simon Dingle told MyBroadband that cryptocurrencies do carry risk and people must not invest more than they can afford to lose.
“If newcomers are chasing profits, then cryptocurrencies are as good a place as any to do it,” he said.
“People chasing a quick buck usually just get their faces ripped off by the market. That’s fine if they feel like doing it, but I’d prefer to spend my energy elsewhere.”
Dingle said investing in cryptocurrency purely to make quick profits is risky, and many people lose a considerable amount trying.
Another issue plaguing newcomers to cryptocurrency is a lack of knowledge about how blockchain technology works.
This means new investors are often scammed, lose their private keys, or send their coins to the wrong address.
“Make sure you do your homework on where you are buying your cryptocurrencies from. Only use reputable exchanges like Luno in South Africa, or Bitstamp in Europe,” said Dingle.
Dingle recommends using a hardware wallet like a Trezor or Ledger Nano S, or a secure software wallet like Bread, Blockchain, or Copay to store cryptocurrency.
Many phishing scams prey on a newcomer’s lack of knowledge, asking them to provide their wallet details to avoid a “hard fork”, or pose as third-party wallet providers.
Scammers also leverage the unregulated nature of the environment to create their own cryptocurrencies, presenting no real product and holding ICOs aimed at inexperienced newcomers.
Dingle said potential investors must learn about how funds move around on the blockchain and how they can control their funds.
“Take time to learn about the difference between controlling your own keys and how to back them up, versus trusting an exchange to look after your keys for you,” said Dingle.
Dingle stated that many cryptocurrency investors do not fully understand how blockchain technology works or the concepts behind the coins they have bought, but are looking to profit from the growth of those coins.
The blockchain technology underpinning cryptocurrencies has the potential to disrupt global banking, legal, and financial systems, and each cryptocurrency is usually backed by a development team which is building a specific infrastructure or application on the technology.
“I’d venture that most investors have a limited knowledge of what they’re investing in,” said Dingle.
“That isn’t just true of cryptocurrencies. People follow the crowd and very few take the time to truly understand what they’re doing and why.”
Dingle believes that learning about the technology behind cryptocurrencies is more rewarding for newcomers, rather than just judging their potential to make money.
“If newcomers want to learn about one of the most exciting developments in human history, then I believe learning about cryptocurrency has a lot more to offer than just the potential of profits.”