Myth 1: Cryptocurrencies are a scam.
Many people think cryptocurrencies are the biggest scam in the world. This is far from accurate. In fact, blockchain, as noted earlier, disrupts intermediate players. That is why the current doorkeepers shout “scam” – they are the ones who will get disrupted. Look at companies like Google or Facebook. When they started, they were small companies with less than a million-dollar valuation. When more people started using Google for searches, it became far more valuable. From a million-dollar valuation, it went to an 800-billion-dollar valuation. Is that not an exponential increase in price? But would you classify it as a scam? No. That is how technology scales anything. The technologies used for Bitcoin and Ethereum are also spearheading decentralization and changing the way the internet works, the way finance works and the way our lives themselves work. There are scammers wherever there is money, but that does not mean that the whole space is a scam. Later in the book I will give you practical strategies for distinguishing scams from genuine opportunities.
Myth 2: You can make a ton of money and buy a Lamborghini soon.
This is far from true. You can make a lot of money, but you can also lose. There are two sides to the coin. Many people with this thinking end up in pump-and-dump scams, which happen in the cryptocurrency space almost every day across the globe. First, compared to traditional markets, there are fewer options available for leveraging that don’t entail a huge risk. Second, the few exchanges that do provide leveraging peg the prices to underlying prices they themselves calculate. That means that during highly volatile times, you might not always benefit the way you should – and you might even end up with losses. Third, in such volatile markets, stop-losses – triggers set up to minimize loss – are at high risk of getting struck. Fourth, leveraging is only possible with top currencies, not smaller ones. So even if you have an edge in picking up the best and you don’t get caught up in scams, you can’t leverage those smaller coins.
Myth 3: Traders with a background in technical analysis have the best insights and make the most money.
This is anything but true. Technical analysis is only an advantage if stoplosses work. In the crypto market, as noted earlier, the volatility – sometimes 10 to 15% in a day – makes it challenging to limit risks. Also, there are other great benefits, such as dividends by fork or by staking, that technical analysts cannot predict. Many times, holders of good coins get their highest payoffs from the greatest upward moments. But a good systematic technical analyst leaves the market as soon as he achieves his payoff target, and would end up missing the bull run in that coin. Even as the first person in the market, a technical analyst would not get the full benefit of bull runs.
Myth 4: VCs – Venture Capitalists – do the best with crypto, because they can invest early and can make exemplary returns.
Sometimes yes, and many times no. First, VC investment is very risky due to early-stage issues: the team may not fit well or key team members might quit, the idea may not be good, the product may not fit the market, the market could turn out to be small or not even exist, the product may come too early to market so that the cash runs out. As crypto is a new area, the best is to wait and observe the progress of the project and how it clears early-stage hurdles. Having a plan for a blockchain network is important, but carefully executing that plan is crucial. In the blockchain space it is always possible to fork by copying the open-source code. So even if a VC enters early on an investment, competitors with much stronger operational expertise will probably do better by simply forking. Venture capitalists make returns between 25% to 35% on average.1 Yes, that is 35%, not 350% or, as many claim, more than 10000%. For every one investment that creates a return of 100 times its value, VCs invest in 100 companies that end up with zero value – so they average out.
Myth 5: As a technologist, you have a huge edge in this space.
This is true to a certain extent, but therein lies the problem. There are multiple technologies involved – each of them evolving very rapidly – from cryptography to consensus algorithms, smart contracting language to distributed ledger technologies. Infrastructure is evolving in terms of scalability, security, privacy, and more. All this means that you need to have a solid grasp of many technologies, not an easy feat for even the best people in the industry. And the cryptocurrency space is not only a technological matter, but is also about economics, incentivization, social communities, and even game theory – it is complex. You need to have a feel and understanding for multiple things, not just technology alone.
Myth 6: With ICOs you can make loads of money by investing early.
This has been one of the biggest myths in the cryptocurrency space. Hundreds of people jumped in as experts in ICO – Initial Coin Offering, a method to raise money for a cryptocurrency – and consulted clients on where to put their money. There was a time in 2017 when most of the crypto fund managers were ICO specialists.2 They specialized in taking money and investing it in ICOs. The idea was to invest in a blockchain company early, and then when it is listed in exchanges, sell it at a higher price – flip it, to use their expression. Then came crypto winter – when all ICO prices dropped more than 80% – and a complete wipe-off for investors. What about bull phases? Is ICO a good method then? Even in a bull market, 90% of ICOs could never list in any respectable markets or exchanges, so the money invested was illiquid and washed away in crypto winter for pennies. Also, in a bull run you would make more money in the underlying Ethereum platform than by investing in half a dozen ICOs with mixed performances, taking into consideration the time you would spend getting to know the ICOs, the time you would spend getting in and out of the ICOs, and the promised tokens that would never come in because they were scams.
Myth 7: You can make tons of money by following signal providers.
First, there is no compliance around many cryptocurrencies. Who advises what, and how legally, morally, and ethically responsible they are is highly questionable. And, there is no easy way to find good signal providers. Signal providers are supposed to provide timely information – a signal – to buy or sell in the market. However, there is always the possibility of a scam, with the signal providers buying coins first and then sending the signals for others to buy. This happens often with free signal providers. Paid providers are better than free ones, but they aren’t always right. Many signal providers base their signals on volume surge or drop, but those can generate many false positives. If you follow such a provider too closely, you will end up bleeding – false positives must be filtered out or they will destroy your win ratio. You might get lucky a few times, but in the face of scams and false positives, performing consistently is difficult.
Myth 8: You can make money by picking up on tips from celebrities, influencers and your friends.
There is some truth in this, but following others blindly can make you lose massively. First, others may have different existing positions, risk appetites, and long-term horizons from your own. So when they say something good or bad about an investment, they are doing so in their own context. For example, some would be fine with a drawdown of 40% in the short term if they believe in the long term. But if your risk appetite and short-term needs are very different and yet you blindly follow, a drop-down of 30% might make you decide to quit. Second, the cryptocurrency space is evolving and asymmetrical, and not everyone has enough knowledge about it. The people you’re following might not have as much knowledge as you assume. Third, those who do have enough knowledge may be promoting a product for their own benefit, not yours. Because this space is unregulated, people shill – promote a coin for their own advantage. Somebody may have bought massive quantities of a coin only to talk it up and then sell it to you.