How to manage crypto investing risks for new investors

crypto investing risks

It seems like everyone in crypto has a war story they like to tell about the time they lost a bunch of coins because of some rookie investment move. But I think the one about UK IT Engineer James Howells who dumped 7500 Bitcoin on a hard drive back in 2013 takes the cake. He lost a measly $361 million at today’s Bitcoin price. The moral of the story for the crypto uninitiated? Losing your coins is just one of the many crypto investing risks for new investors. So before you invest your hard earned into the space, we’re here to help you get informed on what it takes to invest successfully in crypto and get to financial freedom.

Hopefully you come out the other side of this article with the know how to bag a fat stack of coins and to keep them.

What do we mean by cryptocurrency investing?

As a new crypto investor, it’s likely you’ll start off with more straight forward types of crypto assets so we’ll focus on those. By crypto investing, we mean investing in cryptocurrency projects that have associated coins and tokens.

We also mean investing in Decentralised Finance products and services to earn interest on your cryptocurrency assets.

We are not talking about complex crypto day trading, margin trading, futures trading or options trading.

Is crypto risky?

Yes it is. It’s new technology and the market is largely unregulated. Crypto assets are also non-custodial. These features can heighten crypto investing risks for new investors if you don’t understand the investing landscape.

However, we would argue it’s also risky NOT to invest in crypto!

Cryptocurrency, in its decentralised and non custodial design, aims to be an alternative to the awful global monetary and financial policy we’ve suffered since the GFC. Crypto is also about more than the coins themselves. It’s about disruptive technology that is here to stay and that we think will shake out some large industries, with finance being just one.

The point we’re making in this post is that you can still invest and manage risk. That’s why we’re sharing everything we’ve learned and do to identify and manage our crypto investment risk exposure.

Know before you invest in crypto that you are in control and that’s the way the ecosystem is designed! No-one is responsible for actively managing your assets and your investing risks but you.

Is the risk worth it? It has been for us because it’s still early stages and we argue the technology development curve is yet to hit exponential growth. But you make up your own mind, hopefully after considering the risks and how to manage them.

Why do you need to know how to manage crypto investing risks?

Because cryptocurrency is non-custodial and decentralised. There are no middle men to transact for your or look after your assets. You need to do this yourself and if you don’t understand how to manage the risk of being custodian of your own money, then it’s likely you’ll fail at that important task.

Besides, there is little to no regulation to fall back on if something happens to your coins. There are no government bank guarantees and very few consumer protections in crypto. And that’s the way the industry likes it. It’s an asset class designed around non-intervention of governments and middle men. All of this means you have to know how to take care of your assets yourself. The way it should be!

If you are a first time cryptocurrency investor, you’re probably new to crypto market idiosyncrasies. Have a read of this post about what makes cryptocurrency prices rise and fall. If the concepts are new to you then it’s super important that you learn how to manage risks because your risk profile is high as a newbie investor.

Risk comes from not knowing what you’re doing.

Warren Buffet

You also need to know how to manage crypto investing risks because as an asset class crypto is potentially one of the greatest asymmetric investment opportunities out there right now. Asymmetric investments are when you risk a small amount of capital for the opportunity to earn much larger returns. This is entirely possible in crypto – we’ve seen it ourselves.

13 crypto investing risks for new investors and how to manage them

Here are our top 13 crypto investing risks for new investors and how to manage them:

  1. Price volatility – price swings in the double digits daily
  2. Illiquidity – you buy in to an asset but can’t sell it when you need to because trading is too thin
  3. User complexity – technical complexity of blockchain transactions for new users
  4. Crypto exchange crashes – platforms go down with your crypto on them
  5. Project collapse – and the associated coin and token goes with it
  6. Hard Forks – a project splits and so does the value of the coin or token
  7. Smart contract failure or hack – hacks are rife and often unrecoverable (or at least uninsured)
  8. Regulatory risk – risk of non-regulation and new regulation
  9. Human error – goes with the technical complexity of crypto
  10. Market manipulation – whales throwing their weight around causing prices to pump or dump
  11. Theft or hack – physical or cyber, how do you protect yourself?
  12. Scams – mostly online and completely insidious, millions have been lost this year alone
  13. Rug pulls – DeFi fly by night operators absconding with your treasured coins

Now read on to learn about each risk and how you can protect your crypto assets….

1. Price volatility

The price volatility of crypto is enough to put hairs on your chest. But what is price volatility anyway? Investopedia sums it up as the range of price change a security experiences over a given period of time. Now check out this epic chart from the guys at Trading View showing Bitcoin volatility over two historic market periods – 2017 and 2021. Price corrections of between 20% and 50% are run of the mill for BTC.

It’s worth understanding in context that Bitcoin is less volatile than other small cap coins. So you get the picture – volatility is real in crypto with coins capable of moving hundreds of percent in a day. If you can’t take the heat stay outta the kitchen.

But what are the actual risks of price volatility for an investor? Good question right! The price may move up or down dramatically, but this can be as beneficial to investors as it is risky. It all depends on your entry and exit as well as your investment horizon. If you buy the dip, then price volatility can be totally fly. But if you buy the top it can crush you.

Here’s how to manage your risk

Learn how to read a price chart and charting indicators. Understand from the chart what part of the market cycle you are investing in. If you have a clear view of this, short term volatility is less draining emotionally. For example, if you’re riding a mark down phase (which would be dumb, but it happens) you’re going to be more worried about price volatility (compounding losses) than you would if you’re in a mark-up phase.

Traditional market cycle – knowing what phase you’re in can help you manage short term price volatility.

Set an investment plan before you invest. What is your aim and your timeframe? What is your break point?

Use trading tools like stop losses to avoid price crashes if you’re not investing for the long term.

If you’re an anxious investor, set your stop losses and don’t check your coins every other day! In crypto there’s ‘weak hands’ – investors that don’t have the conviction of their investment plan and sell out with price weakness, which is inevitably selling at the wrong time. There’s also ‘diamond hands’ – investors who are undeterred by large swings in price.

Which one are you?

2. Illiquidity

Crypto has a low barrier to entry which means that new projects, with their own coins and tokens, are popping up all the time. Some crypto assets, particularly the new projects with micro or small market capitalisation, are traded very thinly. If you’re looking to invest in these projects there’s not a lot of volume. This all means it can be hard to find a buyer or someone to trade with if you want to sell or swap your investment. Particularly if you’re selling at a volatile time.

Here’s how to manage your risk

When you buy a crypto asset, ask yourself “Will i be able to sell when the time comes”? “What is my exit strategy?”

Buy assets that are well traded on exchanges with large volume. This may prevent you from buying some micro caps that are only available on smaller centralised or decentralised exchanges. But that’s the risk mitigation bit in force. If you do buy thinly traded crypto you should understand how to time your exit and sell in small amounts, such as by using bots, to offload your investment. This is also good practice if you have a bag full of the asset and you don’t want to tank the price as you sell down your holdings.

3. User complexity

Crypto is still an early adopter asset. The technology is nascent. This means it’s not necessarily user-friendly to transact with. I remember the first time I sent some crypto through cyberspace I was freaked out. I only sent $100 worth because I wasn’t sure I’d done it right and didn’t trust the technology. But the crypto arrived and the rest was history.

Seriously though, if you ask any crypto investor the first time they put money into a new product, service or protocol there is always that nervousness about how to make it work. Seeing your money disappear into cyberspace when you’re not completely sure it’s going to reappear where you want it to can be heart stopping.

The thing to understand is that crypto transacting is different to bank transacting. It uses different processes and technology and you have to get used to that. Banks have had years to perfect the simplicity of their services (and many still haven’t got it right). Crypto on the other hand has been around for a couple of decades and until 2020 has been the bastion of super brainy IT nerds and tech savvy gamers. There’s been no driver until now to make it user friendly and that means in most cases it’s still involves a learning curve.

Here’s how to manage your risk

The best way to overcome user complexity is by learning the technical and market basics.

Read up on the information we have posted about how to make money with cryptocurrenchere and here. Follow these tips on managing risk as you learn the ecosystem:

  • Crypto investing – Use the financial service providers you do know – like Paypal – to start investing in larger cap crypto assets like Bitcoin. Paypal provides an ‘on-ramp’ to crypto that many people will recognise and be able to use easily on first attempt. If you do use these conventional on ramps to start your investing just know that you will be paying a premium on the exchange rate from fiat currency into crypto. Think of it as the price of convenience but once you learn how to navigate the ecosystem there cheaper ways to transact.
  • Making money with DeFi – start with Stablecoin interest earning products. These are simple to understand as they’re just like bank interest. The least complex way to do this to sign up for a Celsius account and download the app on your mobile phone. If you’re worried about where to buy Stablecoins like USDC and USDT, Celsius will let you buy them directly via credit card. They will charge 3.5% fee on the transaction, which is high in crypto terms. But they do offer 8.8% interest on your USDC and USDT once you have it.

Earning interest on Stablecoins means you’re not subject to the same price volatility as other crypto because these coins are pegged to the dollar. It’s just an easy to manage way to dip your toe in the water of crypto investing, but it’s not where the real money is made.

4. Crypto exchange crashes

Exchange crashes are rare but we’ve seen them happen at the most inopportune times. One very large crypto exchange went down right in the middle of a gigantic market dump in 2020 and all anyone could do was sit back and watch. Technical issues took them a couple of hours to fix but by the time the platform was up again the market meltdown had eased. It meant at the time that we were able to buy the dip on that exchange. Luckily we had other exchange accounts with some crypto in them that we could use to transact.

Here’s how to manage your risk

Keep your crypto hodl bag (the crypto you plan on holding for the long term) in a hardware wallet. If your assets are secure in your hardware wallet it means you have full control of them at all times. You can load them onto different exchanges at any time as you need to sell or swap.

Also, set up accounts on at least three different exchanges. Pick ones that are not all based in the same country (helps to manage regulatory risk). That way you have back up accounts to transact from when one exchange goes down.

We recommend that you set up separate accounts with Binance (largest volume, loads of coins), CoinsSpot (starter exchange for Australians), and Kucoin (micro and small cap coins).

5. Project collapse

When you invest on cryptocurrency you are investing in technology projects, run by teams of talented developers, cryptographers, programmers, and so on. Just like any project, crypto projects can collapse if teams implode or important personnel leave the project. Or maybe the project was based on a dumb idea, poor tokenomics or flawed code. This article from the Fool indicates more than 2000 cryptocurrencies have failed. If a project collapses, that’s usually the end of the associated coin or token.

Here’s how you manage your risk

This is a tough one to manage. You can of course keep your investments to well known projects with substantial funding and strong tokenomics. If you do want to invest in some true speculators then your risk management options are all about early exit. Keep your ear to the ground on Twitter. Follow the project and the crypto news. You’re aiming to get any adverse news about the project before it hits mainstream and tanks the price.

6. Hard forks

Many decentralised crypto projects use consensus models to govern project development. Coin or token holders can vote on key project decisions and consensus is sought. Hard forks can occur when there is no consensus on an important project decision.and the project literally forks in two different directions. Depending on their nature, hard forks can erode the value and adoption of a project’s coin or token, causing the coin’s price to decline.

Here’s how to manage your risk

Stay up to date with project developments on the project website. Understand any upcoming forks and their timing (they can take some time to play out) and make a conscious decision about whether you will divest, and when.

7. Smart contract failure or hack

Smart contracts are automated ways to handle value exchange between two parties, without involving a middleman, such as a bank. Because they are bits of code that execute in a decentralised way, they can be buggy and suffer from vulnerabilities like any other code.

According to this article from popular crypto exchange Coinbase, smart contract are susceptible to operational risk, implementation risk and even design risk. Poorly constructed smart contracts are also susceptible to theft by hacking.

One feature of the crypto ecosystem is that project teams offer bug bounties or rewards for tech savvy internet nomads to identify bugs within smart contracts so they can be fixed. Smart contracts can also be audited independently to try to identify vulnerabilities.

The real problem occurs when vulnerabilities are not identified and smart contracts with millions of dollars invested fail or are hacked.

Here’s how to manage your risk

Smart contract risk is an all or nothing deal, so the first rule is don’t put in what you can’t afford to lose. Be as safe as possible with your investment and due your own due diligence. Only put your money into smart contracts that have been audited and where the audit results have been made public. You can also get on and see what other developers and programmers are saying about a particular protocol or smart contract. Some projects offer insurance on their smart contracts as a way to attract new investors, although insurance products like these are new to crypto and have not been put to the test.

8. Regulatory risk

Let’s face it, regulatory risk exists with every money making venture. You never quite know which direction government policy makers will pivot to next. But in crypto regulators are a quantum leap behind the 8 ball. In the US for example, government still hasn’t ruled on some of the most fundamental matters, such as whether crypto is a security or some other type of asset. This means the regulatory risk exposure is akin to highly speculative financial products. And it’s not just in the US. Around the globe there are crypto friendly governments, and some not so friendly. So how does all this present risk for your investments?

Firstly, rumours of regulatory action can cause FUD in crypto markets – Fear, Uncertainty and Doubt. FUD is market sentiment that can move the price action of a particular asset, mostly in a downward direction.

Real regulatory action can also move the market. Sometimes regulation moves the market up (if it’s crypto friendly) because having regulation in place provides certainty for investors. Sometimes regulation can cause a sell-off and move prices down if it’s perceived as punitive or as hampering development of the space

Here’s how to manage your risk

Keep up to date on crypto regulatory news from the US (as primary market) and from your home country in particular. If there is major regulatory change afoot you will hear about it on Twitter. Follow some crypto projects and personalities like Cameron Winklevoss, Michael Saylor or Mike Novogratz. Once you know about a potential regulatory change you can make your own mind up. Will it support crypto or will it hamper growth? This knowledge will help determine what you do with your investment.

9. Human error

This one goes hand in hand with the non-custodial nature of cryptocurrency. If you lose the private key you need to transact your crypto assets, you will need to have your recovery seed phrase at hand. If you have a particularly human moment and lose your seed recovery phrase, you’re done. That’s it. Drop the mic – your crypto is gone.

Here’s how to manage your risk

This one’s simple – do not lose your seed phrase!. Here’s how to go about it…

Keep your crypto secured with a hardware wallet.

Get a metal crypto wallet for the recovery phrase that backs up your hardware wallet.

If you don’t have a hardware wallet or metal seed storage wallet then you’re exposing yourself to cyber hack. We recommend this site – to find the best hardware and metal crypto wallet. We personally have the Ledger Nano X and the Billfodl metal wallet to keep our crypto safe.

Treat both your hardware wallet and your metal seed phrase wallet as though they are little bars of pure gold. Store them securely in different locations (never together).

10. Market manipulation

Ever heard of crypto whales? Whales are large holders of particular assets, for example Bitcoin whales or Chainlink whales. Whales can and routinely do use their large holdings to manipulate price action in crypto markets. So how do they go about it?

Whales can place very large sell orders at a price below other sell positions in the market creating volatility following which prices can fall. The falling price can then cause a chain reaction as stop losses set by other traders are triggered. 

That’s just one example of how whales might use their coin bags to manipulate price in the crypto market.

Here’s how to manage your risk

Cryptocurrency blockchains are publicly viewable which means if you know how to read the data you can work out whether ownership of the coin is concentrated in the hands of the few. Coins with concentrated ownership are ripe for the picking by manipulative whales.If you don’t want to go through the laborious task of doing this analysis yourself or are not technically inclined, you can use Glassnode or CryptoQuant – blockchain analytics services.

Or you can do absolutely nothing – accept this risk as a part of crypto price volatility and move on. That’s what we do, along with not putting too much of our money into a single crypto asset.

Diversification in crypto is a foundational risk management approach – use it! Diversify across assets, across DeFi protocols, across exchanges, and platforms. Divvy up your investments into smaller bags that you could afford to lose if something goes wrong.

11. Theft or hack

There are two types of theft you need to manage risk for in crypto

  1. Cyber theft or hack – just as it sounds, this is the theft of your crypto on the internet. It can happen to your directly – where coins are stolen from your online wallet – or through a third party like a crypto exchange or DeFi protocol. Exchanges and protocols are hacked regularly, with the latest being a $600 million white hat hack of PolyNetwork.
  2. Physical theft – you might be wondering how physical theft can occur in crypto if your coins are non-physical objects. Ever heard of the “$5 wrench attack”? It’s basically where someone steals your hardware wallet and with it the private keys to your cryptocurrency.
Here’s how to manage your risk
  • Good cyber hygiene
    • keep your apps and operating systems up to date always.
    • Use a password service like LastPass to manage your passwords.
    • Make sure you have unique passwords on your home WiFi and modum.
    • Use 2 factor authentication on websites and apps associated with crypto.
  • Use hardware wallets and metal crypto wallets – you don’t have full control over your coins if they are on an exchange. The best way to avoid theft via an exchange or protocol is to transfer your coins to a hardware wallet. If anything happens to your hardware wallet you can recover your coins with the wallet’s recovery seed phrase. This is why you also need a metal crypto wallet as well as a hardware wallet. A metal crypto wallet is an indestructible and secure place to store the recovery phrase for your hardware wallet in case you need to restore your crypto nest egg.
  • Proper physical custodianship of your hardware wallet and metal crypto wallet – keep them secure and apart. If one is stolen with the other your coins are gone and unrecoverable.

12. Scams

Scams in crypto are rife and understandably this is very off-putting to new investors. According to the US Federal Trade Commission, the most common crypto scams are:

  • Giveaway scams – members of particular online crypto communities get free coins if by send their coins to a posted wallet address
  • Bogus websites – with scam investment opportunities offering block buster returns using fake testimonials
  • Impersonators – Elon Musk impersonators have duped unsuspecting coin holders out of $2 million collectively
  • Online dating apps – used to lure people into cryptocurrency investments (yeah I know I can’t believe it either…)
Here’s how to manage your risk

Scams are a problem that you can overcome by knowing what you’re investing in and by doing your own due diligence. If you come into crypto understanding that it’s designed to be decentralised and non-custodial, you’ll appreciate that you alone are responsible for the security of your assets. If you get this, you’ll do your own due diligence and only invest in crypto with demonstrated real world use cases. You’ll accept that investing in anything else is either highly speculative or you’re at risk of being scammed.

Here are some tips to avoid getting scammed if you’re new to crypto investing:

  • NEVER send your crypto to wallet addresses sent to you in unsolicited emails, social media, group chat apps like Telegram and WhatsApp.
  • If you come across an ‘investment opportunity’ that seems too good to be true then it just is.
  • Don’t respond to unsolicited offers. If someone reaches out to you to join a crypto community or promote a killer crypto investment opportunity over social media, via email, in Youtube comments or in any message group forums it is likely a scam.
  • Make sure you have the genuine website or app. Fake websites, apps, groups or project profiles are a big issue in crypto. Type the web address in every time and don’t use autofill. Link to the project app directly from the developers website and don’t search it on Google Play or The App Store.

13. Rug pulls

A ‘rug pull’ is a phenomenon specific to decentralised finance (DeFi). A DeFi rug pull is when a team of developers disappear with all of the liquidity added by users to a particular DeFi Protocol liquidity pool. If you want to know more about DeFi lending and liquidity pools (and how to make money from them) check out our How to Invest in DeFi post.

Rug pulls and other types of DeFi exit scams are on the rise as more capital flows into the DeFi space with a reported $240M lost in just the first 5 months of 2021.

How to manage your risk
  1. Avoid new DeFi projects – early projects is where the serious money is made, but it’s also where authenticity and legitimacy are questionable. At a minimum avoid low initial liquidity projects. Just like in the fiat world, scammers find it tough to raise large bags of initial capital for new projects.
  2. Make sure there is a project whitepaper and read it. Compare it to other legitimate white papers.
  3. Watch out for social media campaigns on tokens with claims of benefits that are too good to be true. Fake hype on Telegram and Twitter is a telltale sign.
  4. Research the project – is the developer team transparent and known in the crypto community? If not, do you really want to trust them with your assets?
  5. Get on to Reddit and research the token and the project and any red flags raised by other developers.
  6. Check that there is an audit of the protocol by an independent know auditor. Audits are expensive and having one helps legitimise the project.
  7. If you are more technically savvy, check the smart contract history on Etherscan or Polygonscan.
  8. Watch the token price. If the price starts to tank, get your coins out immediately. Offload the scam token and get your valuable tokens back in to your hardware wallet!

Can you really make money with cryptocurrency?

make money with cryptocurrency

When my first transaction completed on the blockchain in early 2020 I had no idea whether I’d make money with cryptocurrency.

I just new that the world had changed overnight, and I wanted a hedge. So I bought some Bitcoin at $7800 and some Ethereum at $222.

I’d wager a bet that there are many crypto curious investors out there today that want to make this same leap but haven’t. You might be one of them.

You’re worried about the volatility of crypto assets. Perhaps you’re concerned that the market has topped. Maybe you’re torn so you’re sitting on the sidelines waiting for some kind of sign that it’s safe to invest…

In this post we’ll try to help answer the one question that you and other new investors want to know before jumping in:

Can you really make money with cryptocurrency?

Spoiler alert! The answer is Yes but it’s not guaranteed of course….. Now let’s find out why.

7 legit reasons you can make money with cryptocurrency

The macro investing environment is increasingly accepting crypto as a new investment class. Are you picking up the signs? Check these 7 legit reasons you can make money investing in crypto:

  1. You’re investing in disruptive technology not cryptocurrency
  2. Institutional, corporate and venture capital investors are getting in now
  3. The technology is still early on in its adoption
  4. Monetary and fiscal policy may not help you any time soon
  5. Surveys show record numbers of retail investors plan on jumping in
  6. Profits have been strong for many early investors
  7. The barriers to investing can be overcome with good risk management

1. You’re investing in disruptive tech not cryptocurrency

Cryptographic currency really started as a way of incentivising and enabling the operation of online ledgers so that two parties could exchange value without middlemen like banks. It’s technology that automates the decentralised exchange of value. Because of this, crypto is more about the tech than it is about the coins and the tokens. It’s important to understand this if you’re searching for greater assurance about investing in crypto.

The ability to automate and decentralise the process of exchanging value will disrupt and transform multiple industries and create new ones.

Ark Invest, one of the world’s top innovation investment funds managers, sees cryptocurrencies as enabling a new paradigm for monetary systems and mechanisms to store and transfer value. Think banking, finance, money markets, logistics, gaming, health, food, and the list goes on. There are real use cases for blockchain technology in most of these industries today.

The upshot? Blockchain tech and crypto are not going anywhere.

2. Institutional, corporate and venture capital investors are getting in now

We wrote a post in April where we offered up 7 reasons why Bitcoin should be on your radar. It’s worth a read before you go any further.

One of the reasons we raised back then was the money flowing into cryptocurrency from corporations, venture capitalists and more speculative institutional investors. As an indicator of this, investments in Grayscale’s Bitcoin fund jumped 18X from $500 million to $6 billion in 2020. Mainstream institutional investors are not even invested yet due to a lack of regulatory clarity according to this Forbes article.

Since when have you had the chance to get in on the ground floor and front run mainstream institutional investors?

Add to that recent reports from Bloomberg that venture capital funds have made a $17 billion bet on cryptocurrency and blockchain.

make money with cryptocurrency

Our point is, if you follow the money flows at some point you’ll end up in crypto.

3. The tech is still early on in its adoption

How many people do you think own cryptocurrency today?

It’s a simple question, but one that’s difficult to answer because the holdings and data is decentralised by design. You’ll find different answers to the question of how many people own crypto depending on where you look.

One NYDIG survey of cryptocurrency investors estimates that 46 million Americans now own Bitcoin. And that’s just one cryptocurrency (albeit the most ubiquitous one).

For Australia, that number is roughly one in six adults or 17%.

And the thing about crypto is that it’s borderless. It’s literally global, which makes for a huge potential market for use and adoption.

What this all means is, we’re still early! If you’re familiar with innovation adoption S-curves, here’s a graph that demonstrates how early we are when compared to other disruptive tech adoption throughout recent history:

If surveys indicate adoption rates at below 20% for retail investors, this means we’re still right at the beginning of the S-curve. That doesn’t mean all blockchain projects will make you money. But if you get it right the risk to reward ratio can be asymmetrical for early investors (small risk, large reward).

4. Monetary and fiscal policy may not help you any time soon

Governments have been printing money and kicking the fiscal and monetary policy can down the road since the GFC in 2008. It’s gotten worse since 2020. The purchasing power of retail investors is being systemically eroded on a global scale across major economies. Some estimate to the tune of 15% a year. People are literally watching their hard earned wealth erode in front of their eyes.

But did you know that Bitcoin was borne from the GFC to remedy this very scenario?

We think that cash is trash and we chose to need to have our wealth in other value vehicles. As monetary policy continues to play out, our view is that more people may see crypto as a hedge against monetary policy – just as we did in 2020.

5. Survey’s show record numbers of retail investors plan on jumping in

It’s no coincidence with the flow on effects of rubbish fiscal policy that a number of surveys now show retail investors continuing to buy in to crypto in record numbers in the coming 12 months.

This Gemini survey of 3000 people estimates another 50 million Americans plan buy cryptocurrency in 2021. The Australian reports that 13% of Australians are planning on investing in the next year.

So why are they planning on investing?

The Gemini Study found that 69% of crypto investors today see it as a long term investment strategy and 36% of investors trade crypto to make a profit.

For early investors, continued retail interest in crypto assets means rising demand for coins and strong network effects for key blockchain networks.

6. Profits have been strong for many early investors

How does that old caveat go? Historic returns are not an indication of future performance. But we always look at it anyway because none of us have a crystal ball right? So let’s look at the performance stats for some core cryptocurrencies.

According to blockchain analytics firm intotheblock, in late 2020 at the peak of the market, 97% percent of all Bitcoin wallets and 88% of all Ethereum wallets were in profit. Here’s the data:

Large price corrections in crypto in May 2021 will have dampened these numbers. And keep in mind, what goes up can always come down. Markets are cyclical and prices move accordingly. The overwhelming long term trend of large market cap crypto like BTC and ETH has continued on an upward trajectory since their inception around 13 years ago.

7. The barriers to cryptocurrency investing can be overcome with risk management

Here are 5 common barriers to cryptocurrency investing raised in surveys and in the mainstream media, as well as ideas for how to overcome them:

  1. Volatility – It’s true that crypto is a volatile asset. Prices for large cap coins can move 20% in a single day. It seems that this volatility is the single biggest deterrent from new investors getting into the crypto asset class. Volatility can be managed like volatility in other stocks. How? These are the methods we’ve researched on the internet 1) Dollar cost average in to your investment. 2) Don’t bet the ranch all on crypto – only invest what you can afford to lose. 3) Don’t short term trade unless you know what you’re doing – the graph below indicates returns as high as 300% annualised for those that have held their Bitcoin for 5 years.
  2. It’s complex – crypto is still early stages so it’s not user friendly to transact with. When you’re sending your wealth around in cyberspace it can be downright scary for some people. But there are ways to overcome this by learning the technical basics. Start with the information we have posted about how to make money with cryptocurrency here and here. Start with more ubiquitous assets like Bitcoin which is easy to buy through Paypal, and start with interest earning Stablecoin products.
  3. Fear of buying the top – cryptocurrency prices have retraced from their historic highs of May 2021. Some investors are fearful that May was the top for crypto. Investors that bought crypto between early February and early May 2021 and in late 2021 are likely underwater. But the counterfactual is that if you bought at the top of the last crypto bull run in 2018, you’d be ahead today by almost 30%. Check out the graph of Bitcoin annualised returns over 5 years below from New York Digital Investors Group.
  4. Its a bubble – you’ll hear commentators in the news: cryptocurrency is a huge bubble just like the dot com era. Crypto is hugely overvalued and all bubbles burst. Ask yourself though, overvalued compared to what? If it’s fiat currency we are comparing with then everything’s a bubble – the stockmarket, commodites, real estate. Start comparing assets ratios with reserve bank holdings and you’ll get a different picture. This kind of commentary is a great headline grabber and is bound to create fear in many crypto curious. We think it’s worthwhile doing two things before falling for this old chestnut – 1) take a look at the vested interests of the commentators and whether they heavily tied to existing financial systems and assets; and 2) take a look at what respected investors do not what they say. Then make up your own mind.
  5. It’s full of scams – there are loads of scams in crypto and understandably this is very off-putting to new investors. But it’s a problem that you can overcome with mindset and by doing your own due diligence. If you come into crypto understanding that its designed to be decentralised and non-custodial, you’ll get that you alone are responsible for the security of your assets. If you get this, you’ll do your own due diligence and only invest in crypto with demonstrated real world use cases. You’ll accept that investing in anything else is purely speculative and could even be a downright scam.
make money with cryptocurrency
Annualised 5 year returns of Bitcoin versus a group of other common asset classes

The final word – is it time to rationalise your fears?

We’re not here to convince you to buy cryptocurrency. We’re here to share different information than you might hear or read in the mainstream media, so you can make up your own mind. We’ve made the case that you can make money with cryptocurrency and offered up 6 reasons why. We’ve shown how you can overcome 5 common barriers to investing in crypto. Our plan is to make money with cryptocurrency by focusing on real world use cases and investing for the longer term.

None of this is financial advice peeps – in fact if you asked a financial advisor they’d probably tell you to stay the hell away from cryptocurrency! 🙂 But here at the LLP we’re huge fans of taking control of our own finances and making our own decisions. No-one cares as much about your wealth as you do after all!

If you want to know more about crypto markets, here’s a super useful post about understanding crypto market structure. Please read it before jumping in if you decide to do so!

If you do purchase crypto assets you’ll need to safely secure them. We recommend using this site to get your hands on the best cryptocurrency hardware and seed phrase storage wallets. You’ll need these to protect your assets from theft and cyber attack. They’ve even got some useful FAQs to explain what all that means!

Til next post have fun, be happy and do good!

How to invest in DeFi and earn double digit interest on your savings

How to invest in DeFi

Part 3 of our series DeFi: the new financial frontier

In part 2 of our DeFi: the new financial frontier series we talk about how Blockchain technology is causing tectonics shifts in money systems with something called DeFi. As bank interest rates tank to record lows, company dividends take a hit and inflation climbs (see our inflation post here), financial freedom seekers and FIRE investors are falling on hard times. If financial freedom starts with saving more of your income, but your savings are going backwards, how do you get ahead? In this post, we talk about new opportunities to invest in DeFi crypto.

Lending with Decentralised Finance

We’ve already mentioned in our DeFI series that using Blockchain, anyone can lend their own money directly into DeFi crypto lending protocols and earn far better interest rates than the bank. This can all be done basically with a little bit of set up leg work and a few clicks of your mouse button. If you missed that post its important background for this one – you can find it here.

In this post, we’ll run through an example of how to make better than bank or term deposit interest on your fiat currecny, with DeFi.

We’re going to use a combination of the following resources so if you haven’t set these up yet that is a good place to start:

  1. An account somewhere you can buy Stablecoins and some Ethereum token – like a crypto exchange. We’ll use Binance.
  2. A web wallet to transfer your coins between the exchange and the lending protocol. We’ll use a browser extension wallet called Metamask but another is MyEthWallet. Actually there are tonnes of different wallets you can use – if you want to find the safest kind use a Hardware Wallet.
  3. A lending protocol. We’ll use Aave but others are Maker and Compound. You don’t need an account with them to lend money into their liquidity pool.

What interest rates can you get with DeFi?

The thing to know about DeFi crypto is interest rates fluctuate with market supply and demand. Shock horror I know. A world where banks don’t control interest rates, actual lending markets do!

We start on a DeFi crypto borrowing and lending platform called Aave. This example runs through a web based step by step, but there are a bunch of mobile based apps (wallets) that you can use pretty seamlessly to access an entire ecosystem of DeFi lending products. Its a whole new world of banking out there peeps! Here is a great resource if you want to earn interest on your crypto on the go with a list of the best mobile crypto wallets.

If you open Aave and click ‘deposit’ at the top of the screen you can find the lending and borrowing rates for different DeFi Stablecoins. If you’re not sure what Stablecoins are or how they are different to other crypto coins, take a look at part 1 of our DeFi series.

Now, not all of these are Stablecoins so the ones you are looking for are in red.

How to invest in DeFi
Aave lending protocol V2 interest rates

I currently have some Tether (USDT) which is a Stablecoin I bought with my Fiat money. It’s sitting in my Binance wallet. I’ve decided to lend that USDT on the Aave platform. Today’s interest rate is 5.22%. If you don’t own coins already, your first step will be to buy some on Binance and once you do it will appear in your Binance wallet.

The next step is to transfer the USDT from my Binance wallet to my MetaMask web wallet. Think of this step like taking fiat currency out of your bank account and putting it in your physical wallet so you can use that money.

If you’re using MetaMask for the first time, here’s a great article with some basic set up instructions for MetaMask wallet.

This is as easy as going into your Binance wallet, selecting the coin, then clicking transfer and entering in the amount you wish to transfer.

You then need to go into your web wallet and click and copy your MetaMask web wallet address for the Ethereum network. Once you have the address copied to clipboard, go back into the Binance transfer page and follow the prompts to paste in that address into the transfer screen. You then click transfer. Some verifications will happen and this all takes a few minutes.

I also need to transfer some Ethereum into my web wallet to pay the gas fees for using the Ethereum Blockchain. I use the same process to do this on Binance with same web wallet address from MetaMask but by selecting ETH instead of USDT as the coin I want to transfer.

Once you’ve completed the transfer you should see the coins in your Metamask wallet, but you may need to add the coin types to your MetaMask wallet first before they appear.

A word on ETH gas fees

As AAVE is built on the Ethereum blockchain, you need to use the Ethereum network and its token (ETH) to interact with AAVE. The ETH token acts as your ‘gas’ to use the Ethereum network. You’ll often see this referred to as ‘gas fees’.

One caveat in using DeFi crypto is that gas fees on the Ethereum network can be very, very high. The fees change with supply and demand and with transaction complexity. The fees work out to be exorbitant on small transactions, so economies of scale matter when you are moving Stablecoins around in order to lend them out or use them as collateral to borrow. If the gas fee is $225 (which it was when I went to use the Ethereum network this morning), then you need to move at least $7000 USD worth of USDT in order to recover the gas fees in your interest (transaction in and out of Aave) and stay ahead based on the lending rate for USDT in this example.

One way to get around the high Ethereum gas fees is to transact through the Matic network. This requires a slightly more advanced tech level. Matic acts as a sidechain to the Ethereum Bockchain. You will need to add the Matic network to your web wallet add funds to the Matic Layer 2 protocol to do this. Once you have the Matic sidechain set up and funded in your MetaMask web wallet, you then open the Matic Mainnet in your web wallet and connect your web wallet to Aave. The Aave integration should show that you’re in the Matic/Polygon sidechain.

There are a bunch of other ways and DeFi crypto products that help you to avoid ETH gas fees and we’ll go over these in other posts.

If you take a look on Aave using the Matic network you don’t have the same range of Stablecoins open for deposit or the same interest rates as you do using the Ethereum network. Fees are lower using Matic, but so are interest rates. So Matic is better if you’re lending smaller amounts but Ethereum pays off if your lending larger amounts.

How to invest in DeFi
Matic Polygon sidechain version of Aave lending protocol

DeFi crypto is still early days

Here we come across the catch with DeFi. Its nascent, so the actual use of the DeFi system isn’t quite living up the decentralised finance ethos because of the fees involved sometimes on the Ethereum network. Developers are working on computational ways of reducing fees and only once this happens will DeFi become practical for many smaller users. It can also be tricky to navigate at first and integrations between exchanges, wallets and protocols can be a bit buggy. The risks are also wildly larger than operating in the fiat money system. Be warned that this is speculative investment.

Depositing into Aave Liquidity Pool

After moving the USDT and ETH to my web wallet, I have to connect my web wallet to the Aave protocol. This is a simple click at the top right corner and a process of following their prompts.

How to invest in DeFi
Connect your wallet to the Aave lending protocol

Once connected I can transfer the USDT in my web wallet to the Aave lending pool by hitting ‘deposit’ at the top of the screen. This will take you to your web wallet interface so you can select the coin and transfer amount. Before I confirm the transaction, Aave shows me the gas fees involved.

The final word – higher interest is just a few clicks away

So now, my savings have gone from fiat, to USDT and have been deposited into the Aave lending pool. I’m now earning the market rate, which today you can see is 5.22%, but tomorrow could be different. You can still make money in your sleep if you’re prepared to risk more and lend larger amounts into these DeFi liquidity pools. Be sure to manage your risks as we mention here. Also, test the tech first with small amounts. Aave is a well known platform with over $18B USD equivalent in its Liquidity Protocol and the likes of Mark Cuban lending through it. But don’t put all your eggs in one basket because true to the Blockchain ethos, it’s a non-custodial protocol and that means if things go to custard, there is no protection for you.

Til next time – have fun, be happy, do good!

The game of money is changing – so what is DeFi?

what is DeFi

Part 2 in our series DeFi: the new financial frontier

A new financial architecture is being built by super smart computer technologists and even some economists. It’s called DeFi crypto and it’s about much more than just crypto. It’s going to be bigger than Bitcoin. Perhaps even bigger than the internet V2.0. In fact, it’s the single most important thing you as a financial freedom seeker can get your head around – now. But what is DeFi? What does in mean for your financial freedom in practical terms?

Our DeFi: the new financial frontier series is helping financial freedom seekers understand the monumental shifts in the tectonic plates of our global money system. If financial freedom is all about how well you play the game of money, then that game just got new rules so stay tuned to this series as we explain them.

Who controls the ledger controls the money game

Ledgers have historically recorded financial and commercial transactions between people – the ‘who owns what when’ – since, well, a long time.  If you think about it, for any significant exchange of value, there’s a central record of the transaction kept by someone. Ledgers are more than just a record. They’re also about trust. An independent third-party bearing witness to the exchange of value between strangers and so on. Whoever controls the ledger has significant power in the game of money. Over the rules that is. How transactions must occur, between whom, and how much they cost.

So, who controls the ledgers? Middlemen such as banks, insurers, brokers, auditors and policy makers, and the institutions they have created do. And through this the centralised control of money has become the norm. But will it always be?

What is DeFi? The new rules of decentralised money

what is DeFi

DeFi is the decentralisation of financial products using blockchain technology.

DeFi uses Blockchain technology to replace the role of middleman in financial and commercial transactions and decentralise the control of money.

Blockchain was created to act as a ledger that no one entity could control but that needs the participation of many to operate. It seems simple on the surface but in its very design, blockchain technology fundamentally ‘up-ends’ the money game as its currently played. That’s why there is a lot of scrambling going on in the halls of traditional financial institutions, about Bitcoin and cryptocurrency. But cryptocurrency and bitcoin are just white noise once you step back and take a look at the bigger picture of Blockchain meets Money.

Blockchain meets money

Blockchain technology’s decentralisation of money – Decentalised Finance (DeFi) – will profoundly change our money future.  The changes have already started. The introduction of Blockchain technology to the world of finance is seeping into the money system under the cover of crypto and Bitcoin. Over the coming decade, DeFi crypto will likely impact the way you save, where you put your money, how you borrow, where and how you invest in assets, how you manage them, the stocks you buy, your retirement nest egg, your investment income and any trading you might do. Just about everything to with your money.

You see, Blockchain changes the money game in four critical ways:

  1. It acts as an immutable public ledger through which participants can validate transactions automating the trust element between third parties,
  2. Its design decentralises control over that ledger,
  3. it allows the tokenisation of assets by fractionalising ownership of those assets, and
  4. It transcends national borders, putting opportunity in the hands of the masses and millions of unbanked across the globe.

What does DeFi mean for your financial freedom?

The real-life impacts on your financial freedom due the structural changes being bought borne out through Blockchain and DeFi crypto are profound peeps! Here are just a few we can think of:

  • Faster financial and commercial transactions – blockchain now provides an easy way to send money quickly and cheaply across the globe
  • Fewer middlemen and rent takers = fewer fees and charges = you keep more of your hard earned assets
  • Lower barriers to entry – no minimum investment requirements for example that apply to some of the most profitable instruments in financial markets
  • Lower cost to buy in to financial opportunities so greater access to markets
  • Fairer ways to grow wealth
  • More transparency to replace the opaque rules that currently apply to the game of money – particularly gold investing, and
  • The biggest of them all: You get to control your money – no custodians, banks, no gatekeepers clipping the ticket or saying no to your financial future

The final word – may the odds be ever in your favour

I really want to focus on that last dot point because it is exactly what financial freedom is about. You taking control of your money. DeFi crypto can give you new tools to do exactly that – if you learn the rules of the game and get comfortable with the tech. Don’t be afraid, but do get educated. And do manage risk! The new game of money is here.  It involves investing in cryptocurrency and decentralised finance. As they say in the movies, may the odds be ever in your favour!

Check out part 3 in our DeFi series to see how to earn double digit interest on your money with DeFi crypto.

Until next time – have fun, be happy, do good!

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