Crypto land is confusing. Here are five things I wish I knew before buying

Two months ago I bought my first crypto currency.

I tipped in $100 as an experiment, hoping that having some skin in the game would help me better understand this brave new financial world.

Am I still confused? For sure. 

But it doesn’t have to be so mysterious.

If you’re thinking of diving in yourself, here are five things you should really be across first.

1. Jargon, so much jargon

Don’t know your DAO from your DeFi? Your Nocoiners from your Altcoin? Your HODL from your Cold Storage?

You’re not alone.

The crypto world is full of jargon and acronyms and so much assumed knowledge that it can feel very exclusionary and exclusive.

For example, this is a recent headline from a crypto newsletter I’ve signed up to:

“Goguen: Alonzo Hard Fork. The Alonzo Protocol upgrade went live on Cardano mainnet around 10:00pm enabling Plutus smart contract capabilities.”

No. I don’t get it either.

The heavy reliance on jargon is not surprising for currencies created by web developers, but for us mere civilians it can make reading about possible investments bamboozling and off-putting.

What is DeFi?

Imagine a world where you can purchase a house directly from the seller, without needing to go through banks, lawyers and real estate agents.

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No surprise, then, that according to crypto trading platform BTC Market’s 2021 Investor report 77 per cent of Australian crypto holders are aged between 18-44 (and the same percentage are male).

In short, even though the number of females and older investors are increasing, the “crypto bros” who speak the lingo are still running the show.

2. There is no crypto 101

There is no set-and-forget course to teach you everything you need to know about crypto.

Digital currency is evolving in real-time, at lightning speed, so becoming informed and staying that way is a never-ending process.

“There is a lot of information and you can get overwhelmed,” agrees Steve Vallas, CEO of Blockchain Australia.

“The challenge is getting quality information as the ecosystem develops.”

I found a good place to start is ASIC’s Moneysmart website, which has a primer on crypto currencies and initial coin offerings (ICOs).

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New projects usually post a ‘white paper’ for investors, but Moneysmart warns they aren’t always accurate.

Mr Vallas recommends going to trusted financial services brands for their analysis of potential investments, though most crypto assets aren’t regulated in Australia and many individual advisors are unwilling or unable to competently advise on digital coin strategies.

In fact, BTC Market’s Investor survey found only 2 per cent of crypto investors said the most important factor in their decision-making was guidance from a broker or financial adviser.

Ten per cent cited ‘finfluencers’ or social media as their biggest consideration and 8 per cent took their cues from family and friends.

BTC Markets CEO Caroline Bowler said the absence of professional advice was concerning.

“We’re talking about Australians putting in considerable amounts of their own personal wealth and there is a need for those professional services to spring up around it,” she said.

Until that happens, Mr Vallas’s best advice is to “go wide” and read as much as possible.

3. You will be bombarded by people trying to sell you stuff (and some are scammers)

“Start earning crypto rewards today!”

“Guaranteed minimum 100x returns!”

As soon as you start searching about crypto, or posting on socials about it, be prepared for a lot of spam trying to get you to sign up to an AMAZING launch/product/vehicle with GUARANTEED RETURNS!

Some of these are legitimate investment projects which, like any business, may fail or may succeed.

Some of them will turn out to be “shills” who will “pump and dump”.

In non-crypto-speak, that means people with a profile, who will pump up a particular coin to their followers, and when plenty of other people have bought in and pushed up the price, will sell their holdings.

And a significant number will turn out to be scams.

So what is left for me to learn? Well, a lot.

Australians lost $70 million in investment scams in the first half of this year, and more than half of that was lost in cryptocurrency scams, according to the ACCC. 

The consumer watchdog wants us to be particularly wary of anything promising low risk and high returns, apparent celebrity endorsements (as they can often turn out to be fake), or anything relying on the supposed expertise or algorithm of a crypto-genius.

I wasn’t quite prepared for just how much spam and push-selling I would get. Have your guard up and if it sounds too good to be true, it probably is.

4. What drives prices?

This is a complicated one, and something I am still far from understanding myself.

When a single tweet from Elon Musk can send prices soaring or bombing, just how scientific is this whole game or is it mostly driven by sentiment and FOMO [Fear of Missing Out]?

“Absolutely FOMO drives some of the activity,” Steve Vallas says.

But it’s a lot more complicated than that, he adds.

Professional traders use sophisticated models to predict where prices will go.

For early-stage investments in new crypto currencies (there are now thousands of crypto currencies, crypto assets and crypto commodities), things like the protocol, the team behind it and the stage of investment are all factors.

The “mining” process (creating the coin) is also a factor, with more difficult mining processes meaning it’s more difficult to increase supply therefore putting upwards pressure on the price when demand is high.

One of the most widely used charts for predicting Bitcoin changes is the “stock-to-flow” model, though recent deviations in Bitcoin’s price from what the model predicted mean people have questioned its worth.

Around half of the total value of all the crypto currencies is in Bitcoin, and it’s often called “digital gold” because it shares some attributes with the precious metal, including scarcity, and investors using it as a hedge against movements in currency markets.

The one thing that’s certain is that prices are extremely volatile and sometimes there may be no obvious reason for changes in a token’s worth.

You’ll know when I’ve figured out how to predict a crypto currency’s worth because I’ll be hanging up my reporter boots and will be off to the Bahamas*.

(* this is not happening any time soon)

5. Crypto is tribal

Much like Tesla and Apple have their fan-boys and girls, and their love of a brand becomes part of their identity, believers in particular crypto protocols can become evangelical.

There are the Bitcoinists (who might refer to other currencies as “shitcoins”) and see themselves as the original warrior true believers of crypto.

Ethereans, or devotees of Ethereum, love the cooperation of its open source protocol and often use unicorns and rainbows in their profiles.

No-coiners are the anti-crypto team, the sceptics who question the whole digital coin ecosystem, but are still enmeshed in the world.

And of course the true believers in the smaller coins (hello Elon Musk and Dogecoin) who can get carried away in their own hype about the power of their chosen currency.

Read too much from proponents of one coin, and just like if you hang with mates who all barrack for the same football team, you’re more likely to get sucked in too.

It’s fun to watch the battles on social media though.

So what is left for me to learn? Well, a lot

Honestly, after bumping up my investments to $400 and trying to learn about crypto with the very limited free time I have, it still feels more like I’m taking a punt than making a strategic decision.

That’s why I always keep in mind some sound advice – never spend more than you can afford to lose.

But I know I have to keep trying to learn, because with big institutional investors and governments all getting into crypto and the blockchain technology behind it, it’s only becoming more embedded in our financial system.

And that means we will all have to understand it sooner or later.

This is general information only. If you need personal advice, please seek out a professional.

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