Interested in investing in crypto but feeling overwhelmed with no idea where to start? You’re not alone. Investing in crypto can seem scary with so many stories about people being scammed making the rounds on news outlets and social media.
Like many industries, there are bad actors in the crypto space. On top of that, many of the key benefits of crypto also lead to less protection for investors. However, crypto is an exciting space which can confer incredible financial benefits to users.
Don’t let the stories scare you away. The best way to thread the needle and reduce risk is to educate yourself before you get into crypto. Like anything new that you try, understanding what you’re doing and why is the key to success.
To help you get started, we put together five things you should think about before dipping your toes into crypto.
Each of the tips included in this list come from a cryptocompliance perspective. We spend a lot of time working with clients to help them build businesses that protect both themselves and their customers from fraud and financial crime. Whether you’re investing in crypto as an individual or looking to invest in a business, these tips will help you.
The bottom line is this: it’s imperative that you work with cryptocurrency businesses that prioritize compliance. If a company doesn’t have the right compliance policies and processes in place, consider that a red flag – a really big red flag that’s waving in your face. Don’t ignore it.
Understanding these tips will help you navigate this worthwhile space with more confidence and security. Let’s get started!
1. Do Your Own Due Diligence
When you’re investing in crypto, don’t blindly believe what other people say. Always do your own due diligence. Don’t feel pressured to act on something you see in the media or on Twitter.
To be a successful cryptocurrency investor, you need to avoid the hype and do a lot of research. Read up on everything you can and avoid falling into the fear of missing out (FOMO) trap.
Smart and successful investors don’t make decisions based on their emotions. Instead, they learn the fundamentals and build solid investment strategies that are based on their own research.
For example, imagine you’re starting to invest in crypto and hear about a “great” investment opportunity. Don’t jump on board based on other people’s opinions (or sales pitches disguised as opinions).
Instead, ask yourself some key questions. Is the coin solid? What type is it? Transactional? Asset-backed (stable)?
If you don’t know the basic questions to ask and what answers you want to hear in order to support your investment strategy, then you could make some big investing mistakes.*
2. Protect Yourself
There is no consumer protection in cryptocurrency. This means that you have to protect yourself. Unfortunately, there are new cryptocurrency scams every day that could put your money and your investments at risk, so it’s important to understand the common crypto scams to watch for. These include:
Phishing is when someone tries to get your private information (such as your passwords, usernames, etc.) using a fake website, email, social media post, and so on.
Pro(tect Yourself) Tip: Never give your private information to anyone unless you’re 100% certain the request is legitimate.
Fake wallets have appeared on the Google Play store and other places over the years.
Pro(tect Yourself) Tip: Always use a wallet you know is from a trusted provider.
Social Media Impersonators
People create fake social media accounts for celebrities or individuals who are well-known in the crypto space. They use those accounts to hype different crypto investment opportunities and scam people into investing.
Pro(tect Yourself) Tip: Don’t believe what you hear on social media sites without doing some research to confirm it. That’s just good advice in life and in crypto investing.
Pump And Dump Groups
Do your homework before you join a crypto group that you’re invited to on Discord or other online platforms.
A common crypto scam is when a group of people get together to make a type of coin look like a great opportunity. Once enough investors have driven up the value of that coin, the group dumps it (making a nice profit) leaving everyone else to take a loss.
Pro(tect Yourself) Tip: Research any group you’re invited to before you join (and definitely, before you invest).
Pyramid Or Ponzi Schemes
This scheme relies on “membership” where members have to recruit more investing members, and they earn money based on how much the members they recruit invest.
Pro(tect Yourself) Tip: If an opportunity promises returns that are too good to be true or encourages you to recruit new members, it’s probably a pyramid scheme that you should avoid.
More Tips To Protect Yourself
In addition to the tips to avoid cryptocurrency scams mentioned above, here are some steps you can take to stay safe:
- Don’t talk about the crypto exchanges or wallets you use (or your gains) online.
- Set up separate email addresses for each of your crypto-related accounts.
- Use two-factor authentication for all of your logins.
- Don’t click on links or download attachments in email messages unless you can verify the sender.
- Invest in coins and use wallets and exchanges from well-known, reputable providers with verifiable histories and security features.
- Use long, challenging passwords, and keep your computer’s anti-virus and security software up to date.
- Diversify your portfolio, wallets, and exchanges so all of your money and investments aren’t in the same place.
- Keep most of your cryptocurrency investments in cold wallets offline and smaller sums that you use for daily transactions in hot wallets that can be accessed online.
3. Choose Companies With Real KYC/CDD Policies And Procedures
Cryptocurrency companies are required by law to follow strict Know Your Customer and Customer Due Diligence policies. A KYC/CDD policy requires that crypto companies do the following:
- Identify and verify the identity of all customers
- Identify and verify the identity of specified beneficial owners of any companies that open accounts
- Understand the nature and purpose of customer relationships in order to develop customer risk profiles
- Conduct ongoing monitoring to identify and report suspicious transactions and to maintain and update customer information on a risk basis
The purpose of KYY/CDD is to detect and prevent money laundering and terrorist financing, but as an investor, it also gives peace of mind that a crypto business is complying with the law. In addition, you can feel more confident that the company will be able to identify anyone who tries to access your account other than you.
Bottom line, if a company promises 100% privacy but doesn’t ask for any information to verify your identity, they’re not complying with regulations and you should avoid dealing with it.
4. Understand Regulators And Regulations
Cryptocurrency businesses must comply with rules and regulations from the U.S. Securities and Exchange Commission (SEC), the IRS, the Financial Crimes Enforcement Network (FinCEN), and the Office of Foreign Assets Control (OFAC). Each department and agency is responsible for cryptocurrency oversight with a goal to keep investors safe.
In addition, cryptocurrency businesses are required to comply with a number of regulations, including the Bank Secrecy Act, the Money Laundering Control Act, the Money Laundering Suppression Act, and the USA Patriot Act. Each of these regulations includes rules that protect consumers from financial harm.
Take some time to understand cryptocurrency laws and regulators, so you can identify legitimate crypto companies to work with.
5. Learn the Difference Between Decentralization And Privacy
Decentralization is a significant benefit of crypto that allows people to make transactions without revealing their personal information. However, it’s not the same as privacy.
Don’t go so overboard protecting your privacy that you start buying crypto from risky places like the dark web. Stick to above-board exchanges, businesses, coins, and wallet technology with reputations for having good security.
Key Takeaways About Investing in Crypto
To be a successful crypto investor, you need to do your research, know the scams to watch out for, understand the laws legitimate crypto businesses must comply with, and choose companies that follow those compliance laws. Working with established businesses and with solid reputations is essential to reducing your overall risk.
If you’re a large-scale investor or an entrepreneur who wants to get into the crypto space as a business owner, contact the cryptocompliance experts at BitAML using the form below for advice on what to look for in terms of compliance in a potential investment or startup.
*Disclaimer: This post is for educational purposes and does not, and is not, intended to constitute investment advice.