7 Things I Wish I Knew About Crypto Before Starting to Invest

It’s easy to fall into common investing traps. Here are seven things I wish I knew when I first got started in crypto.

Tom Blackstone Crypto Expert Tom Blackstone, Cryptocurrency Expert

Bitcoin symbol used as bait in a trap

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Cryptocurrency prices are the lowest they’ve been in two years. And many investors are eyeing the crypto market as a possible bargain. But if you’re new to the game, there are a lot of crypto pitfalls you can fall into.

It was the same way back in 2018, when I first got started investing in crypto. Back then, the newest, biggest thing in crypto was initial coin offerings (ICOs). If you bought the right ICO, you could become rich overnight. But most ICOs were actually scams, and most people who invested in them lost money. (If only I had known what I know now!)

So to save you from pitfalls, here are seven things I wish I knew about crypto before I started investing.

1. Understand How Wallets Work

If you’re new to crypto, it’s easy to think that buying crypto and holding it in an exchange is the thing to do. But many of the best crypto investments can be obtained only by withdrawing coins to a wallet and using it to access decentralized applications (dapps).

For example, Ethereum can be bought from an exchange. From 2018 to 2022, it rose from over $400 to over $4,000. That’s a 10x rate of return. And this might seem like a lot.

But compare that to the first Axie Infinity characters, which could be purchased from the developer for around $3 worth of Ethereum. In 2022, these characters were selling for $200 apiece. That’s a rate of return of over 6,000 percent!

But there’s a catch. You couldn’t have bought Axie Infinity characters from an exchange. No exchange carried them. The only way to get the characters was to connect your wallet to the developer’s webapp and purchase them directly.

When I first started investing in crypto, I bought Ethereum and left it in an exchange. But luckily, by the time Axie Infinity came out, I knew how to use a wallet, and I bought three characters for a total of $9 worth of Ethereum. I sold them last year for over $600, but I could have made a way bigger return if I had learned this skill earlier.

So if you want to get stellar returns on crypto items, it pays to know how to use a wallet.

2. Diversify!

Some crypto projects blow up like Axie Infinity did, but most go nowhere.

This brings me to this second point: It can be good to diversify your crypto investments. You never know when some random game you played or that DeFi app you invested a small amount of crypto in will suddenly become “the next big thing.” The more you spread out your investment net, the more likely you are to catch the big fish.

FYI: DeFi stands for “decentralized finance.” It’s financial apps that run on a decentralized, blockchain network. Because they run on a blockchain, DeFi apps usually can’t steal money you’ve deposited into them. This means that you don’t necessarily need to trust the developers of these apps (although you may need to audit the app’s code). You can find more info about this new field in my guide to decentralized finance.

Most of the stuff you buy may end up being worthless. My wallet is full of junk, for example. But every once in a while, you may run across something that is so profitable that it makes up for all of the money you spent on duds.

3. Dollar-Cost Average

It’s entertaining to watch the day-to-day price movements of the crypto market. But unless you’re a skilled day-trader, paying attention to short-term price action might not be helpful.

Most crypto gains come slow and steady. You buy a little each paycheck. Over time, it adds up, and by the time a new bull market hits, you’ve got so much crypto stashd that you can make a nice return from it.

Consider buying the same dollar amount each paycheck. This technique, called dollar-cost averaging, works with most investments: stocks, bonds, mutual funds and, yes, even crypto.

I admit that I still struggle with this problem. I often don’t buy crypto when the market is going down. Instead, I convince myself that I “can’t afford it” right now. Then I start investing when the market is going up. But to get the greatest returns, you have to keep dollar-cost-averaging, week after week, until you get high enough returns that it makes sense to take profits.

Pro Tip: If you’re just getting started in crypto, it can be hard to figure out which exchange to use. Some exchanges are intended for hardcore day traders, while others are more intended for newbies. If you need help choosing the right exchange for your needs, you may want to read our guide to the best crypto exchanges or check out our Robinhood review for a great beginner-friendly exchange.

4. Read the Docs

There are new crypto projects coming out constantly. Some of them may provide huge returns in just a few weeks, but they may also be unsustainable.

One way to know the difference between a sustainable project and one that will fail is to read the project’s documents, or “docs” as we call them in the crypto community. The docs should explain in detail how the project is able to make money for users and what service it provides.

Projects that are likely to succeed will have docs that make sense. You’ll read them and think “Oh yeah. That sounds like it would work.” But a project that is likely to be a scam or a dud will have docs that are vague, or the economic system described in them won’t make any sense.

For example, TerraUSD (UST) was a popular stablecoin in late 2021 and early 2022. Investors could deposit UST into the Anchor Protocol and receive 20 percent interest. Since it was supposed to be impossible for UST to lose value, this seemed like a 20 percent risk-free profit.

But the docs for Terra showed that the argument for its value was circular: Terra (LUNA) (the platform’s native token) had value because of the stablecoins that existed on it. But these stablecoins had value only because they were backed by Terra held in a smart contract. In essence, there was nothing holding up the platform except confidence.

When the crypto market crashed and investors lost confidence in UST, the stablecoin lost its peg. It is now worth only $0.03. Many investors who read the docs realized that the project didn’t make sense, and they avoided losing their money. But those who didn’t read them were left holding the bag.

FYI: Reading the docs is just one way to determine whether a coin is legitimate. Here are some other ways to tell if a crypto coin is safe.

5. Don’t Believe the Hype

One of the easiest traps to fall into when investing in crypto is to be affected by hype.

There’s an entire industry of YouTube personalities and bloggers who constantly make predictions about how this or that new coin is going to the moon. In many cases, these promoters are being paid by the developers of the coins they are shilling.

If a coin has enough hype, it may go up in price very quickly. But oftentimes, these manipulated altcoin markets collapse as soon as the insiders start selling.

The best antidote to hype is to do your own research: Read the docs, audit the smart contracts, investigate the token’s ecosystem, and make sure the project provides a real service instead of just being supported by hype.

6. Understand Crypto’s Value

Making money from crypto is usually a slow process. You may have to start off in a bear market or when no one is paying attention, and then slowly build your stash over time.

The problem, though, is that this requires patience and perseverance. If you’re not sure why you’re investing in crypto, you might be tempted to sell before your investments have had time to pay off.

If you want to investigate why and how crypto gains value (and how it loses value), check out my guide to how crypto gains value over time.

7. Beware of Volatility

Crypto is an extremely volatile asset class. During crypto winters like the current one (mid-2022), an investor may see their portfolio decline by 90 percent or more. Or in a bull market, they may see their investment go up by 100x.

Because of the volatility, crypto isn’t a good place to store emergency savings. If your rainy-day fund is in crypto, it may decline by 80 percent at exactly the moment when the rain comes. So it’s best to invest in crypto only with your “play” money, after you’ve already got your rainy-day fund set aside in more traditional investments.

Final Words

These are the things I wish I knew about crypto before I started investing.

Some of these principles apply to every asset class, inside and outside of crypto. For example, dollar-cost averaging is effective in any market, as is ignoring hype and diversifying.

But others apply only to crypto. For example, you don’t need to learn how to use a wallet to buy stocks, and stocks don’t have docs (although they do have financial reports).

Of course, this list is not exhaustive. But these are the top seven things I wish I knew before I got started investing in crypto.