Cryptocurrency forks What are the benefits for the end user

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What Are Forks and How Do They Impact the Price of Cryptocurrency?

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Last Updated on November 30, 2020

Cryptocurrencies are beginning to completely change the world of finance.

In the beginning, there was Bitcoin, which was designed to function as a decentralized digital alternative to cash. Over time, a number of more specialized currencies have appeared, such as Ripple and Monero. These new currencies didn’t just appear from nowhere, many came about as a result of a fork.

Forks occur when the user base or developers decide that something fundamental about a cryptocurrency needs to change. This can be due to a major hack, as was the case with Ethereum, or as a fundamental disagreement within the community, like we’ve seen with Bitcoin and Bitcoin Cash.

A fork can have a substantial impact on a cryptocurrency. They are often predicated by large price fluctuations and have proven to be quite controversial in the past. To understand why, let’s start at the beginning by asking ourselves, ‘what is a cryptocurrency fork?’

Image via Flickr

What is a Fork and How Does It Work?

In its broadest sense, a fork is simply a change in the blockchain’s protocol that the software uses to decide whether a transaction is valid or not. This means that almost any divergence in the blockchain can be considered a fork. However, there are two main varieties – hard forks and soft forks.

A soft fork is any change that is backward compatible. When a soft fork takes place, older nodes (computers that connect to the cryptocurrency’s network) will still recognize new transactions as being valid. However, any blocks that are mined will be considered invalid by the updated nodes.

This means that, in order to be successful, soft forks require the majority of the network’s hash power. Otherwise, they risk being the smallest chain and becoming orphaned from the Network, essentially becoming a “hard fork.”

A hard fork is any change that breaks backward compatibility. Nodes running the old software will see any new transactions as invalid. This means that in order to mine new “valid” chains they will need to update. If a large enough percentage of the community decides that they want to continue using the old rules then the chain will split, resulting in two separate currencies.

A hard fork requires majority support (or consensus) from coin holders with a connection to the coin network. In order for a hard fork to be adopted, a sufficient number of nodes need to update to the newest version of the protocol software. This allows them to use the new coin and blockchain.

Any nodes that chose not to update will be unable to use the new blockchain. If enough users don’t update then you will be unable to get a clean upgrade which could lead to a break in the blockchain. There are a number of ways to ensure that consensus is in place before fully activating an update.

Soft forks sometimes use miner-activated updates, where the hashpower of a new protocol needs to equal a certain percentage before the update is adopted. Dash uses its masternodes in order to adopt major changes to the blockchain protocol. But whatever method used, the end result is the same. A majority of the community needs to agree before any fundamental changes can be implemented, or else you risk a hard break.

The end result of a successful upgrade is that a new coin will fork off from the blockchain, from the block where the upgrade took place. Two separate coins with two separate ledgers, all originating from the same blockchain.

In the case of updates like SegWit, everyone ideally updates to the new protocol, so only one coin exists. In cases of hard forks, like Bitcoin Cash, two different coins and blockchains will run simultaneously after the fork. The latter case is an excellent example of a true “hard fork” and these generally end one of two ways:

  1. One blockchain becomes dominant, resulting in the other blockchain having low community adoption and value.
  2. Both blockchains are adopted, co-existing and operating independently of one another with roughly equal community adoption and value.

The first outcome is the most common, as happened with Ethereum and Ethereum Classic, with Ethereum vastly outperforming Ethereum Classic. The second is rarer, but it does happen. Bitcoin Cash and Bitcoin ended up broadly coexisting once the SegWit 2.x update failed to materialize.

Forks can be disruptive experiences for a community. There are often competing visions for the future of a cryptocurrency and this can lead to a point where traders and miners feel that they have no choice but to go their separate ways.

For example, the lead up to the Bitcoin and Bitcoin Cash split happened after a series of increasingly venomous debates within the community. There is still a great deal of ill-will between the now fractured communities, particularly surrounding Bitcoin Cash’s claims to be Satoshi’s “true vision” for Bitcoin.

Sometimes, this level of disruption can be enough to prevent a fork from taking place. The controversial Segwit 2.X fork was abandoned in November 2020 due to the fact that its proponents had “not built sufficient consensus for a clean blocksize upgrade at this time.” Fears that the upgrade may lead to another hard fork and would further destabilize Bitcoin put the plans on hold.

What Are the Effects of a Hard Fork?

Hard forks can have a profound impact on the cryptocurrency and not just because of the uncertainty caused. The Bitcoin Cash hardfork is a good example of a quirk that can occur. Holders of the “parent” cryptocurrency end up with an equal number of forked off coins.

For example, if you had held 10 Bitcoin at the time of the Bitcoin Cash fork, you would have 10 Bitcoin Cash. This can lead to some really interesting ripples within the market.

Large traders, or Whales, can make big waves on the market. Whales are generally large organizations that own hundreds of thousands of Bitcoins. This is enough that their decisions will strongly influence the direction of the market. Some large private traders, or Dolphins, also have enough stake to influence the market to a certain degree.

Let’s imagine that the manager of one of these whales knows that a fork is about to happen and it will result in them obtaining one new coin for every original coin they hold. This gives them a strong incentive to increase their stake in the parent token. Thus, they begin to buy up every token they can find. Their huge size means that they can artificially drive the price of the parent currency higher in the lead up to the fork as the Whales and Dolphins buy up everything they can find.

They will continue to do this until the night of the split. The Whales are rewarded for their investment with new tokens on a one-to-one ratio. Because Whales know that the price of the parent company has been inflated by their actions they proceed to dump both the new token and the parent token on every exchange they can. This can cause the value of both the forked and parent token to crash in value. Over time, their values will begin to stabilize as the traders use their profits to purchase more cryptocurrency.

The above example applies to an extreme case where the entire blockchain is cloned. Not all forks will result in “free” cryptocurrency.

The above example also applies to splits where the entire blockchain is cloned. Many forks only copy the underlying code, so while a new coin is corrected it does not create duplicates. In these cases, traders act a little differently. Depending on the circumstance surrounding the fork you may see traders abandoning the old coin in favor of “safer” bets until they think the market has stabilized.

It is also possible to see traders largely abandon the original cryptocurrency in favor of the new fork, as happened with Ethereum and Ethereum Classic (with the former strongly outcompeting the latter).

Should You Invest Before a Hard Fork?

A hard fork marks an unstable time for a cryptocurrency. The community will often be divided over the issue and the market is generally very volatile, even by cryptocurrency standards. How you will react will largely depend on the stake you have in the currency and the type of fork you are looking at.

In the case of a hard fork, where you will be getting “free” currency, it makes sense to keep hold of your currency or even increase your investment. The downside of this is that other large traders are doing the same. If you are concerned that you might not be able to react quickly enough to sell off before the Whales, you might be better advised to sell your investment just prior to the fork.

You will lose out on the “free” currency but you may be able to make a profit from the Whales looking to increase their stake. You can then use this to buy a bigger share after the inevitable crash.

If you’re looking at a soft fork then your choices are a little easier. If you believe that the fork will help the currency, the best course of action will be to scoop up currency from concerned users, taking advantage of price fluctuations to increase your stake. If you believe that the fork will be bad for the currency then you should sell before the crash. Remember – there is still a chance the currency will split if the community is not behind the fork.

Hard Fork or Soft Fork – Remember That Your Capital is at Risk

Remember that, no matter how certain you are, the market will not always react the way you assume it will. Cryptocurrency is an exceptionally volatile commodity, so you should be prepared to lose money. Ensure that you follow the golden rule and never invest capital that you cannot afford to lose.

Ethereum Core Developers Debate Benefits of More Frequent Hard Forks

Christine Kim

Ethereum Core Developers Debate Benefits of More Frequent Hard Forks

How often is too often to alter consensus?

A group of ethereum’s veteran open-source developers discussed the subject in a bi-weekly meeting Friday, wherein they aired the possibility that system-wide upgrades, also called hard forks, to the software could be enacted as often as every three months.

Wanting to “check the temperature,” the developer asking the question explained that certain upcoming ethereum improvement proposals (EIPs) such as state rents would require multiple upgrades sequentially spaced out for full effect.

Three months, however, in the eyes of Joseph Delong, senior software engineer at venture capital studio Consensys, is “too quick for a turnaround.”

Team lead at the Ethereum Foundation Péter Szilágyi agreed, explaining:

“As a [software] client developer if you’re only job is to implement hard forks and do them then three months is fine but usually clients require a lot of maintenance. So, if you start doing three month hard forks it will essentially take all the time away from general maintenance and performance improvements.”

Ethereum Foundation security lead Martin Hoste Swende, while agreeing that a hard fork every three months “would be a bad thing,” noted that particular cases with simple changes unanimously agree upon could have shorter run times.

“The idea would not be to schedule a hard fork every three months but see if feature X is finished and there exist test cases and it is implemented in all clients. If so, then we can hard fork pretty soon,” argued Swende during the call.

But encouraging developers to take their plans “one step” at a time, Fredrik Harryson CTO of Parity Technologies noted that even a timeline of six months for a planned ethereum hard fork has never been achieved.

“There’s a couple things we probably need to automate in order to do [shorter hard forks] really well. A lot of the time that goes into the hard fork is not just making the code. It’s everything that goes around,” said Harryson.

In addition to this, Ethereum Foundation advisor Greg Colvin noted that most teams building ethereum software clients do not presently have “the right person” to handle essential jobs for hard fork implementation such as “setting up testnets, running test cases, doing testing” among other responsibilities.

To this, Harryson responded the matter was about not having enough finances to onboard such team members. “For us, it’s money. We don’t have enough money behind it,” quipped Harryson.

Multi-step upgrades

But it’s not only a matter of whether or not there should be more frequent hard forks.

Developers during today’s call also discussed whether there was a need for ambitious, longer-term changes to the present ethereum blockchain in light of an impending move to ethereum 2.0 – a new ethereum network which once fully activated users would migrate over to from the current mainnet.

Suggesting that developers like Alexey Akhunov and ethereum founder Vitalik Buterin have cautioned against “changes that aren’t for the survival of the [present ethereum] chain,” Harryson asked:

“How much do we sway outside of this because [EIP 615] leads into a long chain of improvements that go into several years before we’re seeing massive benefits from it.”

EIP 615 is one of five proposals considered for inclusion in the next ethereum hard fork called Istanbul. It aims to introduce improvements to the very heart of the ethereum codebase known as the Ethereum Virtual Machine (EVM) which is responsible for executing all self-deploying lines of code – also called smart contracts – on the platform.

The EVM is also a key technology that other enterprise blockchain initiatives such as Hyperledger have been reported in the past to build interoperability with.

“The design of the EVM makes low-gas-cost, high-performance execution difficult. We propose to move forward with proposals to resolve these problems by tightening the security guarantees and pushing the performance limits of the EVM,” writes the authors of EIP 615 Colvin, Brooklyn Zelenka, Pawel Bylic and Christina Reitwiessner.

However, as noted by Swende during today’s call, EIP 615 as proposed would require at least two hard forks to fully execute and “a positive speed effect” to actual code computations in the EVM would not be noticeable until the latter hard fork is executed.

“That’s my main concern about this EIP, it’s a lot of work but I don’t think it will lead to a much better EVM. It might be better for the external tools like if you’re doing a reverse analysis of the security properties of a smart contract,” said Swende.

Such tooling Zelenka suggested is essential to ensure continued “forward compatibility” with forthcoming EVM upgrades like eWASM and a smooth onboarding experience for smart contract developers in light of “an undetermined ethereum 2.0 release date.”

“There are other options for smart contract developers out there. We need to keep ethereum 1.x alive and that means continuing to move,” argued Zelenka on today’s call.

Agreeing to continue debate and discussion on the EIP in further weeks, Swende concluded that at present he remains skeptical about “implementing such large changes into the old engine which basically takes a couple of hard forks before it finally settles.”

But agreeing with uncertain sentiment around the future of ethereum 2.0, Harryson, who raised the initial question about ambitious, multi-hard fork upgrades said:

“We shouldn’t adjust our roadmap or thinking based on what ethereum 2.0 may or may not be.”

Fork image via Shutterstock

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Cryptocurrency

What Is a Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

Key Takeaways

  • A cryptocurrency is a new form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
  • The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
  • Blockchains, which are organizational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.
  • Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
  • Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.

Understanding Cryptocurrencies

Cryptocurrencies are systems that allow for the secure payments online which are denominated in terms of virtual “tokens,” which are represented by ledger entries internal to the system. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.

Types of Cryptocurrency

The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.

Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto.”   As of Nov. 2020, there were over 18 million bitcoins in circulation with a total market value of around $146 billion. 

Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as “altcoins,” include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS. Today, the aggregate value of all the cryptocurrencies in existence is around $214 billion—Bitcoin currently represents more than 68% of the total value. 

Some of the cryptography used in cryptocurrency today was originally developed for military applications. At one point, the government wanted to put controls on cryptography similar to the legal restrictions on weapons, but the right for civilians to use cryptography was secured on grounds of freedom of speech.

Special Considerations

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology, which is used to keep an online ledger of all the transactions that have ever been conducted, thus providing a data structure for this ledger that is quite secure and is shared and agreed upon by the entire network of individual node, or computer maintaining a copy of the ledger. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.

Many experts see blockchain technology as having serious potential for uses like online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) see the potential to lower transaction costs by streamlining payment processing.   However, because cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. At the same time, there is no central authority, government, or corporation that has access to your funds or your personal information.

Advantages and Disadvantages of Cryptocurrency

Advantages

Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.

In modern cryptocurrency systems, a user’s “wallet,” or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.

Disadvantages

The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others.

Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities to arrest and prosecute criminals. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to trace.

Criticism of Cryptocurrency

Since market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of many cryptocurrencies ensures a high degree of scarcity.

Bitcoin has experienced some rapid surges and collapses in value, climbing as high as $19,000 per Bitcoin in Dec. of 2020 before dropping to around $7,000 in the following months.   Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.

There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.

Cryptocurrency blockchains are highly secure, but other aspects of a cryptocurrency ecosystem, including exchanges and wallets, are not immune to the threat of hacking. In Bitcoin’s 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars worth of “coins” stolen. 

Nonetheless, many observers see potential advantages in cryptocurrencies, like the possibility of preserving value against inflation and facilitating exchange while being more easy to transport and divide than precious metals and existing outside the influence of central banks and governments.

Cryptocurrency Investment Strategy 2020: Don’t Make These 50 Common Mistakes

Anyone can make big profits from investing in cryptocurrency in 2020. You just have to invest at the right time — like in December 2020, when no one could lose.

But investing at the right time requires luck. Only those who improve their cryptocurrency investment strategy every day, one mistake after another, consistently crush the masses.

Only the most skilled and disciplined investors are running away with big profits over time, while dreamers and noobs end up hodling useless coins.

This is why I have curated the ultimate cryptocurrency investment strategy: a list of common mistakes to avoid when investing in the crazy crypto world.

We’ll start with basic mistakes and progressively move to more advanced ones. So if you are an experienced investor, make sure to read until the end.

Let’s get started!

1. You Don’t Know the Basics

If you’re beginning, you’re likely eager to trade. I get it, really.

But don’t rush it. Take a little bit of time to develop a basic cryptocurrency trading strategy and to educate yourself.

Do you know the basics of blockchain technology and Bitcoin? Do you know what circulating vs total supply means? Do you understand what inflation is? Do you know about exchanges , wallets , private keys , and public keys ?

If you can’t answer these basic questions, you’ll be in trouble quick enough. Take some time to prepare yourself, it’s essential.

To learn the basics, navigate our website – there are tons of cool resources to get started.

2. You Don’t Take Action

Every day, potential investors miss out on cryptocurrency investing because they aren’t confident about how to get started.

Even experienced investors miss on new tools or cryptocurrencies that could bring significant profits simply from not staying active.

Why? Because they’re afraid to make mistakes. The first step is taking action, so don’t hesitate to dive right in.

Action will result in experience, and experience will result in better decision making. In fact, the experience is all about learning from the mistakes you make.

If you feel ready to make your first investment, then go for it. Even only $10, on any exchange you want, with any payment method you like.

You can’t imagine the difference a small step will make versus not taking action.

This is where your experience will start, and you will feel the highs and lows of investing – it’s a wild ride.

3. You Don’t Understand the Technology

What makes Bitcoin and many cryptocurrencies innovative is their underlying technology. But if you don’t understand the foundations of the technology, the road will be risky.

You don’t want to rely on others’ ‘knowledge’ to make your investment decisions. Until you can judge these projects for yourself, you will be missing out on big opportunities.

After all, the creators of Bitcoin and its first adopters were all techies.

To avoid this, find educational sources you trust, take the time to learn, and most importantly, enjoy the journey of learning.

Once you understand block rewards , consensus algorithms, premining , and all the fancy jargon, you will be an improved, independent investor.

Blockchain technology is continuously advancing, so keep up with it the best you can.

4. You Ignore Fees

Now that you’ve taken action, take your time and find the right exchange with the best fees.

When people start trading, they make lots of trades a day hoping to earn small profits. While this is nice in theory, fees are killing them. Even if they are low, it all adds up.

Do your research before you trade. To become a successful investor, you need to start taking good habits right now.

5. You Overtrade

Some investors, mostly beginners, want to make 20 trades a day. This is dangerous.

Ultimately, many of them lose from fees or because they make bad trades a mistake and then trade more to recover their losses. Only to dig a deeper and deeper hole for themselves.

The reality is that there aren’t 20 good trading opportunities in a day. Trading too much leads to poor decision making.

6. You Don’t Understand Tax Implications

Overtrading also increases your tax liabilities.

At least in the United States and Canada. Most people think that they only owe taxes on profits that were sold back to USD/CAD, when in fact, you owe taxes on every single trade you make – even crypto to crypto.

The IRS and CRA view every trade as a realized gain or loss. Put simply, if you buy Ether with Bitcoin, they consider this a taxable event on a realized gain or loss. They assume that you sold Ethereum to USD, then purchased Bitcoin with USD, even though this is not what happened.

Ignoring both tax implications and exchange fees will severely impact your overall cryptocurrency investment strategy.

Tax implications, in addition to accumulated fees and bad trades, is another reason why you should not overtrade.

7. You Invest Your Life Savings

Rule number one of investing; don’t invest more than you can afford to lose.

You should go into this ready to lose whatever you put in. Ultimately, as the price swings up and down, you should remain calm and still be living a healthy life with room for regular spending.

I’ve heard countless horror stories of people investing greedily with their entire life savings or borrowing large sums of money. This is a HUGE mistake.

Funny enough, even if you hit it big, your greed will likely win you over. For example, if you invest $50,000 and at one point have $150,000, then your mind will rationalize and normalize these winnings to feel less significant than they are.

The next thing you know, the market drops, and you are back at break even, or at a loss.

8. You Think Cryptocurrencies are Shares

Take your time to educate yourself and understand what you’re investing in.

Cryptocurrencies are not shares like stocks. You have no ownership in the company and receive no dividends.

If a company issues a cryptocurrency, then it is very possible for the company to profit or get acquired, with no benefit to you. A company can be doing very well, yet their coin can drop.

The only exception here may be security tokens which can grant ownership to their investors. But even then, it’s up to the guidelines of the offering.

Cryptocurrencies are a different game.

9. You Chase Cheap Coins

Don’t chase cheap coins with dreams of lambos and private jets.

Lots of uneducated investors in the crypto space buy low priced cryptocurrencies because they think there is a higher chance of big returns.

If presented with one coin priced at $0.01 and another at $75, they blindly purchase the $0.01 coin because they think it’s easier for a coin to go from $0.01 to $0.02, rather than from $75 to $150.

This is a common trap.

There are lots of factors that affect a coin’s price, including two important ones: the circulating supply and the real world value of the coin.

More often than not, a cheap coin has a huge supply of coins, which dilutes the price of each coin. If the supply is massive and there is little real-world value, then the coin priced at $0.01 is not undervalued and should be priced that low.

A better factor to consider when looking for coins with growth potential is the market capitalization of the coin. The ‘market cap’ is calculated as [current price * circulating supply] and is often a better (although not perfect) indicator of a coin’s valuation by investors.

If you want to find the next gem coin, look for coins that have a low market cap.

Low market cap coins have more potential for growth, but they also come with a lot more risk (failure, illiquidity , etc.)

Ultimately, you should stay away from those coins if you’re still at a beginner level, and pick your next investments based on their potential real-world value.

10. You Think You Must Always Be Right

I hate to tell you this, but get over yourself. You’re not always right. And it’s okay.

Investing is a game of speculation which involves some amount of luck – even for professional investors. To be a winner in this space, you only need to be right a certain percent of the time.

For example, if you 2x your investment 55% of the time, then you can afford to lose 45% of the time as you will make money in the long run.

11. You Make Sloppy Mistakes

Hold your horses, buddy! Take your time when transferring your money.

Don’t rush, and make sure the sending and receiving addresses are correct. Never type an address. Just copy and paste them. This way you avoid any chance of typos. And hey, it’s faster!

After you copy and paste it, always verify the first two characters and the last three characters match your address.

12. You Don’t Diversify Your Portfolio

Your cryptocurrency investment strategy must involve diversification.

While it may be tempting, don’t put all your eggs in one basket. Every experienced investor hedges , or protects his/her risk by investing in multiple assets.

You might notice some coins correlate where when one goes up, the other goes down. If this is the case and you like both coins’ futures, then invest in both. Your investment will be much safer.

My recommendation: own a minimum of 5 cryptocurrencies.

13. You Over Diversify Your Portfolio

Be sure to pick a number of coins that you can keep track of. This means keeping up with news and price action.

My recommendation: invest in a maximum of 10 cryptocurrencies at a time.

14. You Don’t Do Your Own Research (DYOR)

Research a coin before you invest in it.

So many people invest based off of hype. They see other investors on Twitter or Facebook talking about a coin, see the coin’s price rising, and then buy off of impulse. This often ends badly.

Do your own research.

When researching a project, you should be able to answer the following:

  • What is the mission of the project?
  • Who are the core team members? Have they worked together before or have past success?
  • When is the mainnet expected to launch?

If you can answer these, then it’s a good start.

Don’t be afraid to miss out on investment; there will always be more to come.

15. You Research Poorly

Once you understand WHAT you should research, then next is starting the research.

The process will be time-consuming if you’re just starting. But the more you research, the better you’ll become at it.

Here are a few basics to get started:

  1. Have a look at each coin’s BitcoinTalk.org announcements thread and website.
  2. Search on the internet to see if there are reviews on the coin or mentions of it being a scam. If you see lots of talk about it being a scam on Google or Reddit , then it’s worth digging deeper into that to understand the reasoning.
  3. Check on the economics of the coin such as its market cap , trading volume , price history, and total versus circulating supply .
  4. Cross-reference opinions from industry experts. Never trust one single opinion.

16. You Don’t Keep Up to Date with your Investments

As you come to own 5, 6, 7, or more coins, the amount of responsibility on your shoulders increases.

Be sure you keep up to date with all of their developments and price action.

  • Follow them on social and through their blog
  • Join their communication channels (Telegram, Discord)
  • Bookmark their websites and Bitcointalk threads

17. You Don’t Have a Plan that you Stick With

Lots of folks let the market highs get to their head. Once their portfolio hits an all-time high , they only want to go higher.

On the other hand, as a coin drops in price, they hold until 0 because they are stubborn about their investments.

The best way to avoid these situations is to set a target, stick with it, and don’t be greedy.

So, when you enter a position, be sure to write down your plan.

18. You Don’t Take Your Profits

If you want your cryptocurrency investment strategy to profit, you have to sell and accumulate profits eventually.

Learn from others mistakes. At the end of 2020, during the big boom of cryptocurrencies, lots of investors became rich IF they sold for profits. On the other hand, many had theoretical profits but overheld into this bear market .

Now, they are stuck holding at a loss, waiting for the next bull run .

Remember: you don’t profit until you sell back to realize your gains.

19. You Don’t Cut Your Losses

Being stubborn is easy. But at the end of the day, the market moves despite how you feel.

Don’t hold a coin you no longer believe in.

You should always ask yourself: “if I had not bought this coin, would I buy this coin right now?”

Be honest with yourself. It’s okay for things to change.

Additionally, if you planned to cut losses at 15%, then do it, no matter how you feel at the time. Don’t rationalize that it will rise – cut your losses and trust the plan.

20. You Buy High

I bet that when Bitcoin was at $15,000 or $20,000, your friends and family were asking you about cryptocurrencies.

That’s because there is a natural tendency for people to follow trends. But those who profit are those who entered the trend early.

DO NOT buy high, especially when a coin is close to its all-time high .

After all, why buy Bitcoin at $20,000 when you can buy it at $3,500? Buying high may be the right decision in some cases, but is a mistake more often than not.

21. You Don’t HODL Hard Enough

On the flip side, lots of investors are impatient and ‘cut their losses’ early because of emotions.

The cryptocurrency market is made of cycles, where prices rise and fall drastically.

If you buy high, then you will need to wait out an entire new market cycle to end up with profits – meaning a new bear , then bull run – which can be well over a year of waiting.

Remember: if you still believe in the project, then your best bet is to be patient and hold strong, even if the price is dropping fast.

22. You’re a Math Noob

Any successful investor needs to understand the basic maths behind trading. If you don’t understand the real implications of a 20% drop, it’s time to learn.

Here are some examples of math-related confusions:

  • If an asset drops 50% in price, it does not need to raise 50% to break even again. In reality, it needs to raise 100%.
    Think about it: if you purchase a coin for $100 and it drops to $50, it needs to double (+100%) in price from $50 to hit $100 again. If it only goes back up 50%, then you will have $75 – still at a loss.
  • The difference between an 80% loss and a 95% loss is extremely significant. To break even after an 80% loss, the price needs to bounce back 5x. To come back from a 95% loss, you’re looking at 20x.

Every 10% drop, makes a bigger and bigger difference.

23. You Don’t Use 2FA

The crypto world is the wild west. Full of opportunities, but extremely dangerous.

One crucial step when working on your cryptocurrency investment strategy is to reinforce the security of your cryptocurrencies.

Enabling 2FA on every sensitive website is the most important habit you need to adopt to increase the security of your accounts.

2FA, or two-factor authentication, is another layer of security upon login. Most cryptocurrency exchanges , wallets , and services offer to enable 2FA.

To enable 2FA, you will need to download an app on your phone – either Authy or Google Authenticator, and sync it with the exchange or wallet via a QR code . It’s super simple.

Next time you go to log in to the exchange/wallet, you will be required to enter your username, password, and the passcode that the 2FA app shows. The passcode changes every 30 seconds, so for someone to hack your account, they will need your phone as well.

24. You Leave Your Coins on Exchanges

One of the most famous mottos in the crypto industry is “if you don’t control your keys, then you don’t control your coins.”

Exchange are huge targets for hackers and are always at risk. When you leave coins on an exchange, the exchange controls your coins. You are trusting the exchange’s security measures and not your own.

Do yourself a favor – keep your coins in a personal wallet.

25. You Don’t Own a Hardware Wallet

I will be straight up: if you’ve invested more than $500 in cryptocurrencies, then hardware wallets are a smart investment.

They are disconnected from the internet, which means that hackers can only obtain your funds if they steal your physical device and also know the passphrase to access it. This makes security a much easier task.

If you have large amounts of money, say over $5,000, then it may be worth buying two. The second can act as a copy to the first one, in case you lose it.

26. You Don’t Know Best Security Practices

Both the wallets and websites you choose to use hold sensitive personal information – do your best to keep it safe!

If someone compromises your accounts, then you can say goodbye to all of your funds. Take security seriously, and learn from those who have learned the hard way.

When using a wallet, hardware or desktop, be sure to:

  • Avoid using Public Wifi
  • Avoid using unsecured software/extensions
  • Use strong passwords

One more important tip: do NOT use your daily email address when you navigate the crypto space. Use a separate one dedicated to your cryptocurrency investments.

27. You Don’t Back Up Your Sensitive Information

Always back up both 2FA and wallet data.

If you lose access to your computer and haven’t backed up your private keys , seeds or passphrases , then you won’t be able to access your coins anymore.

Same for exchanges: you’ll be locked out of your accounts if you lost your phone and haven’t kept a safe copy of the 2FA keys.

Wallets and exchanges will often guide you through the process, so make sure to read and follow their instructions carefully.

For 2FA, I recommend you backup your keys so when you get a new phone, you can recover all of your accounts to log in. Do not forget to do this, as it will be a huge pain and time sink if you forget!

28. You Fall for Scams

Be careful out there. There are scammers in the crypto space, and they become smarter over time.

While I know you are not a gullible old lady, here are some trusted ways to avoid scams:

  1. Double check the URLs you’re clicking on. A URL can be embedded in the text. What if you click on a sensitive link – like a wallet – and end up on a different URL? If you don’t believe me, click on www.google.com and see what happens. You can check the URL embedded in a link by right-clicking on it, copying the URL address, and pasting the URL in a new tab. But DO NOT press enter.
  2. Triple check the domains you land on. You might see some surprises. For example, you may land on coiinbase.com instead of coinbase.com. And believe me, these websites are set to steal your money.
  3. Avoid ‘easy money’ opportunities. Each time you’re offered to get rich online, there is a hidden scam. This includes Ponzi schemes such as the famous Bitconnect case. Remember: Great opportunities aren’t offered to you on a plate.
  4. Ask questions to Google and communities. Type [“Website” + Scams] or [“Website” + Review] on Google, and you should know soon enough.

29. You Don’t Find a Reliable Community to Learn With

Online communities will be handy when you experience any difficulty in the cryptocurrency space.

Whether you struggle to use an exchange or have a question about the fundamental value of Bitcoin – or anything else, surrounding yourself with like-minded people is essential.

These communities can also provide you with a consistent flow of cryptocurrency sentiment to keep a pulse on the industry.

There are great Facebook groups, like Cryptocurrency Investing and Crypto Coin Trader. If you’re not on Facebook, then you can search on Reddit, BitcoinTalk, and Uptrennd.

30. You follow shills

Shill is a common word for someone who is compensated or has a financial incentive to spread the good word about a coin, even if it is terrible.

I won’t name anyone in particular, but lots of influencers, bloggers, and YouTubers have been guilty of promoting horrible cryptocurrencies – sometimes even scams – because of their own, selfish intentions.

Whether they’ve been paid to review a cryptocurrency or have other incentives (they own a lot of coins, they know the owners, etc.), you will be the one paying the price if you follow their advice blindly.

31. And crowds

Well-known shills tend to cause crowds to follow their footsteps. If they are influencers with thousands of followers, then you will see groups of individuals talking about a coin in unison.

This can result in Facebook threads, Twitter threads, and Bitcointalk threads being created with everyone shilling one coin as a crowd.

Do not follow them blindly. Hear the noise, but do your own research about the coin.

  • If you find out the coin is indeed promising, I’m sorry for you because – you likely missed the opportunity.
  • On the other hand, if you believe there’s nothing new under the sun, stay confident, because the coin’s price will surely drop soon.

Take a cryptocurrency called ICON as one example. Lots of people bought in, and there was a lot of traction on major forums and social media outlets.

12 months later, after the crowd hype phased away, the price was down by

Follow this advice: when everyone’s talking about a cryptocurrency, it’s time to sell it.

32. You Enter Positions You Can’t Exit

If you hold a coin, but no one wants to buy it, then you are in an illiquid market.

Liquidity refers to the amount of ease with which an asset can be bought or sold in a market. You can check how liquid a coin is by checking its trade volumes on CoinMarketCap.

Liquidity is essential in cryptocurrency:

  • What if you think cryptocurrency is going to collapse?
  • What if you think one cryptocurrency is going to skyrocket and you need funds to get in?
  • What if you need money for a personal situation?

For any of those scenarios, you’ll need to be able to sell off your position quickly. If the coin you need to sell has low liquidity, you might have to sell it at a lower price to find buyers.

Even worse: if your cryptocurrencies are illiquid, you might have to say goodbye to your money for good.

The less liquid a cryptocurrency, the riskier it is.

If you’re a beginner, don’t even waste your time considering buying a cryptocurrency that has a low daily trading volume.

33. You FOMO

FOMO , or fear of missing out, is a common behavior in the crypto space.

FOMO is when investors feel they are going to miss out on something big, and as a result, will immaturely buy an asset to hop on the bandwagon.

Examples of such persuasion can be project owners or investors tweeting things like: “Huge announcement released next week” or “Big partnership with a major bank to be announced soon.”

Many shills will also take advantage of FOMO by explaining to their audience that a particular cryptocurrency is the next big thing, how the price is soaring, and if they don’t get in now, then they will regret it forever. They persuade investors to buy irrationally – hence FOMO.

Ignore the noise, analyze facts. Your investment decisions should be based on logic, and NOT on emotion.

34. You Fall for FUD

Contrary to FOMO, FUD is short for fear, uncertainty, and doubt. The goal of FUD is to get you to sell, not buy.

So, if the shiller(s) wants to buy into a coin at a lower price, he will start spreading bad news about security vulnerabilities, hackings, team changes, or anything else to cause people to panic sell and lose faith in the project.

Once again – use logic. Understand their motives and don’t act on impulse.

35. You Panic Sell

Besides FUD, another simple reason people sell is that the price drops quickly. But it doesn’t mean it is going to drop more.

Don’t sell in a rush. Have a cup of coffee, discuss with your friends who also invest in cryptocurrencies.

All in all, “control your emotions” and think your decision twice. Don’t forget this is a volatile market and you should be ready to stomach significant losses.

36. You Fall for Media Propaganda

Major news sites will sometimes release very negative, and often, threatening news.

The news may be about a country banning the use of cryptocurrencies, or about how Wall Street doesn’t want to get in. Deceiving headlines are the foundation for propaganda.

A lot of these news articles are intended to generate clicks, controversies, and sometimes even FUD . It’s often very exaggerated.

One more style of content that can negatively persuade you is sponsored content. Websites and media you trust will promote a product not because they use it and like it, but because they’ve been paid to promote it.

Sponsored content is fine as long as it is clearly noted that the content is paid for. Many times, sponsored content looks just like non-sponsored content, which can be deceiving.

The most effective change you can make to improve your long term cryptocurrency investment strategy is to read these articles – not just the headlines – and cross-reference opinions. Stay calm and remain skeptical at all times.

37. You Are Emotionally Attached to Your Coins

Many investors become attached to their investments at an emotional level. They put lots of faith into their investments, and hate the thought of selling before the next pump.

I have met several crypto investors who have been down 95% on an investment. They read that the project has been abandoned by the team or delisted from exchanges, but they still won’t sell because they irrationally believe it will come back.

This goes along with our personal biases we mentioned earlier – humans don’t want to admit they are wrong.

Don’t get emotionally attached to your coins. Always invest based on logic.

38. You Lack Patience

Be patient – because the sophisticated, wealthy investors are.

You may feel desperate to find the next big investment opportunity, but “ whales ” have enough capital to sit on the sidelines for two or more years waiting for the right time to strike. They can easily stay in a bear market, with losses, for years.

In other words, wealthy investors can afford to be in losses for multiple years to shake out weak HODLers. If you lack the patience and knowledge of this, then you will always be buying on the wrong side of the market.

If you are patient enough to wait even an entire year to buy in a bear run or HODL until the next bull run, then you will benefit greatly.

39. You Don’t Stay Clear Headed

Remember to stay calm and relax.

You should have invested an amount you are comfortable losing, so have fun with it. Don’t let the negative press or big news sway you.

If you do let negativity get to you, then you are more likely to make poor decisions.

Disconnect from crypto from time to time to stay clear-headed.

40. You Don’t Understand the Market Dynamics

Bitcoin only makes up about 40-50% of the market’s liquidity . There are thousands of altcoins, and they work in correlation with Bitcoin.

Not understanding these correlations can lead to poor and costly investment decisions. Those who make money trading crypto understand these dynamics like the back of their hand.

There are three situations for how Bitcoin and altcoins affect one another:

    The whole market crashes. In such a case, Bitcoin will often be more resilient than the other coins. We witnessed this firsthand in 2020: Altcoins dropped

95%, while Bitcoin dropped

80%.

  • Bitcoin’s dominance increase. Bitcoin’s price increases sharply, but altcoins remain stable or go down. We witnessed this in September 2020 – November 2020.
  • Bitcoin’s dominance decrease. Bitcoin rises gradually, and altcoins increase in price substantially. We witnessed this in December of 2020.
  • All of these time frames can be viewed using coinmarketcap.com. Take your time and look at different historical time frames to help you better predict the future market!

    Takeaway: if you think the market is ready for a bull run, then add more altcoins to your portfolio. On the other hand, if you believe the market is going down, sell your altcoins for Bitcoin, or even better, for fiat or stablecoins .

    41. You Ignore Airdrops

    Airdrops are free money with little to no effort.

    Many times, new projects will airdrop their token as a marketing strategy to raise awareness.

    You might need to register on their website to claim the airdropped tokens, but sometimes, you have to do nothing at all.

    Check out AirdropAlert to be on top of every airdrop opportunity.

    42. You Don’t Prepare For Forks

    Hard forks are similar to airdrops from an investor’s standpoint – free money! Most investors I know miss out on these opportunities, which can turn out to be quite lucrative.

    Bitcoin Cash is an example of a hard fork of Bitcoin, where all Bitcoin holders received 1 Bitcoin Cash for each Bitcoin in their wallet. Bitcoin Cash trades for well over $100 or $200, so these coins you can get for free, aren’t cheap.

    Just make sure the wallet you are using support the fork. Simple as that!

    Use CoinsCalendar and search for the category ‘hard forks’ to stay up to date.

    43. You Don’t Use the Best Tools Available

    The cryptocurrency industry is full of creative and hardworking people who offer some handy products and services.

    Don’t rely on only yourself, use all the tools at your disposal to craft the best cryptocurrency investment strategy and make better decisions.

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    44. You Hold USDT

    Tether , or USDT , is a stablecoin that is pegged to the value of $1. Each Tether is supposed to be backed by one USD in a bank.

    There are two dangers to holding USDT:

    1. They’ve had a shady past. Many believe that not every Tether is backed by a single USD, which means that if you want to redeem $1,000 USDT for USD, then you’re $1,000 USDT is meaningless.
    2. Transfers cost a lot. Second, most people don’t know this, but just to withdraw USDT from an exchange costs several dollars. If you want to transfer funds to another exchange, it is often less expensive (but more time-consuming) to trade back to a cryptocurrency before withdrawing.

    While it’s okay to enter USDT positions for short-term trades, don’t hold it for too long.

    45. You Don’t Buy the Rumor

    There’s a popular narrative that says, “buy the rumor, sell the news.”

    Often, cryptocurrency projects launch their coin before a final product is made. Rumors can spread around the community about when their product will be complete, which companies will partner with them, and which exchanges the cryptocurrency will be listed on.

    Usually, these rumors create lots of hype. The hype can grow to be so strong that when the real news is released, the price drops.

    One example is the Verge project, which at one time had rumors spread by John McAfee and other prominent figures, discussing partnerships and innovations. The price was skyrocketing on rumors, and some made the best decisions of their lives by getting in early.

    46. You Buy the News

    On the other hand, when the news comes out, do not buy it – it’s likely too late. This is when those who bought the rumor will take their profits.

    When the time came for real news to be released about Verge, the price dropped drastically – well over 80%

    So, instead of just buying coins at the time the news is released, take some risk. Buy the rumor, wait for the bubble to grow, and sell when the news comes out.

    You’ll thank me later.

    47. You Don’t Understand How to Read a Trading Chart

    Once you understand some basic dynamics such as supply and demand, then you should start learning how to read trading charts, also known as technical analysis.

    Technical analysis is a science which helps you better predict the future by analyzing historical market data. You’ll gain a feel for when markets are about to turn, or if assets aren’t priced properly.

    For some, it’s super helpful and core to many people’s cryptocurrency investment strategy.

    BabyPips is a popular place to start learning technical analysis, and it applies to all markets, not only crypto.

    Knowing how to read charts can give you an advantage over those who don’t – and it can be quite lucrative.

    48. You Don’t Prepare for Bull Markets

    Do you believe the market is dead and the entire crypto industry will vanish away just because Bitcoin drops 40%? Of course not. These cycles happen, so don’t be afraid to go against the crowd.

    If you sold when you were in profits, then you should have fiat ready to invest in cryptocurrencies during bear markets.

    Keep these funds available in your wallets and be ready to accumulate your favorite cryptocurrencies when everyone else in the market is panicking.

    But, don’t FOMO! Generally, bear markets can last for well over a year. If you buy the dip too early, you’ll end up losing a lot of money.

    Bear markets should also give you plenty of time to find some altcoins worth investing in. So do not wait until the bull market is back – do your research in advance.

    49. You Don’t Listen to the Market Sentiment

    If the overall sentiment varies, then so may the price.

    While you may expect a bull market soon or be optimistic about a cryptocurrency, other investors may feel the opposite way.

    This is why listening to the sentiment of other investors in the industry is crucial. If you don’t, you might miss the next bear/bull market, or the next cryptocurrency about to moon.

    So, how do you listen to the sentiment of your peers?

    • Read other investors’ thoughts. Not thoughts from influencers or media – from investors, like you and I. You can do this by joining and participating actively in some of the best crypto communities (read mistake #29)
    • Use tools. These tools scrape information from the web and turn it into actionable metrics, and each of them uses different factors to determine sentiment. Alternative.me, for example, scrapes data from trading volumes, Google Trends, and social media amongst other indicators.

    Remember that sentiment is just one indicator of the next market movements.

    When crafting your cryptocurrency strategy, cross-reference different indicators from several sources. Always use logic over emotions.

    50. You Don’t Earn Interest From Your Crypto

    You cannot earn interest from cryptocurrencies as you do with your bank account, but there are ways to grow your bags simply by holding.

    There are three ways to earn interest on your cryptocurrencies:

    1. Stake your coins. If you are holding Proof-of-Stake (PoS) coins, hold them in the official wallet, turn on staking, and you will begin earning stake rewards, much like interest in a bank account.
    2. Margin Lending. Exchanges which offer margin trading allow users to lend coins for a percentage return. This may be small, say 1-2% a month, but it can add up! Even at 1% a month, that comes to 12% a year as a safe return. Beats a 0.2% interest bank account.
    3. Lending Platforms. Nexo is one example of a lending platform that can land you a minimum of

    6% a year. For minimal risk, not a bad deal.

    51. BONUS: You Only Invest in Cryptocurrencies

    This last mistake comes as a surprise, but why invest only in cryptocurrencies? It’s wise to diversify your portfolio not only amongst cryptocurrencies, but stocks, bonds, and other assets as well.

    The stock market is indeed a safer bet than crypto, so if you want to be conservative, put say 15% of your investment funds into crypto. If you hold safe stocks and bonds with the remaining money, then you should be pretty safe.

    Disclaimer: we do not know your financial situation, nor are we financial advisors.

    The world is your oyster, so don’t be afraid to invest in different markets and niches.

    Well, you made it to the end, congratulations!

    Although there are plenty of mistakes to avoid, most of them are common sense and require no memorization. Simply being aware of them should be enough to make you think of and improve your cryptocurrency investment strategy.

    Which mistake from the list prevents you from making more profits? Which one do you make again and again? Do you make mistakes that aren’t listed? Let me know in the comments!

    Lastly, here are more resources you might like:

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