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Cryptocurrency is fraught with danger for the uninitiated. Here's what you need to know.

I'm an engineer. Not a lawyer, computer programmer, stock broker, or financial advisor. That said, I've been an observer and participant in the Bitcoin and cryptocurrency space since very early in 2013. At that time, the Bitcoin price was under $50 (and I thought it was pretty expensive!). So while I haven't been in-the-know since the very beginning, I have been part of the community during its most exciting, dangerous and interesting times. Silk Road, Dread Pirate Roberts, Mt. Gox, the DAO - I got to see them all firsthand.

So, you just heard about Bitcoin. Or more likely, you've heard about it for a little while now, but you haven't really been interested until now. And why not? It's complicated, technical, certainly not yet user-friendly. But now Bitcoin rocketed to new all-time-highs. Ethereum has gone up in vale 32x in one year. Cryptocurrencies are currently making some people lots of money. And new ones are popping up every day and going to the moon!

You can imagine how excited I am about the new wave of people getting interested in bitcoin and other cryptocurrencies. I'm excited about larger adoption and of course, the price increases. I believe in the purpose and the technology of Bitcoin, and I think it is the future.

However, danger lurks in the water, especially for the uninitiated. A lot of hard and expensive lessons have been learned in the cryptocurrency space already, through both mistakes and malevolence. With so many new people and so much more money coming into the space now, the stakes are higher, and the lessons learned don't spread nearly as quickly as the hype. It's still early in the cryptocurrency space (as Andreas Antonopoulos recently said "Cryptocurrencies today are at the equivalent of Internet in 1992") so if you are just getting into the space, welcome, fellow early adopter.

Here are the bare bones basics of what you need to know to grow your wealth and avoid dot-com bubble level losses.

Rule #1 - Control your private keys.

If you do not have sole possession of your private keys, you do not control your money.

The private key is what allows you to cryptographically sign transactions, that is move funds, out of your wallet. Think of it as a physical bank vault key. If someone else is holding the key to your wallet, they control the funds, not you. In traditional finance there are ALL SORTS of laws and restrictions to prevent the teller or bank manager from using that key to walk off with your cash.

In the Wild West of cryptocurrency, NO SUCH PROTECTIONS EXIST. Security is completely your responsibility. Scary, I know. People have and will continue to disappear with millions of dollars in other people's money. And not just hackers and thieves in the traditional sense but also "trusted" owners of companies operating in the unregulated space. The very point of cryptographic decentralization is to eliminate the need for a trusted third-party. While it can no longer be said of every coin and token that exist in the explosion NOW, the original purpose of Bitcoin is that it is a trustless system.

Do not keep your cryptocurrency on an exchange. Move it to a wallet immediately.

Do not trust anyone or any company with your keys.

Rule #2 - Approach every coin as if it is a scam

Most of the "cryptocurrencies" out there right now are nonsense and worthless. Until you can coherently explain to someone else why the thing you are considering buying is not a scam, you should assume that it is one.

If you didn't know, Bitcoin and the first cryptocurrency community that grew up around it have heavy cypherpunk and libertarian or anarchist roots. The purpose of bitcoin is to be a trustless, censorship-proof and peer-to-peer medium of exchange that could not be controlled by any one party. It can't be blocked by banks or governments. There is also a limit to the total coins issued, so it will eventually become a deflationary currency and a store of value, unlike the USD which is constantly being eroded away by inflation.

Since Ethereum and the ICO (Initial Coin Offering) explosion, all or mostly all the tokens have no such purpose. The tokenization is essentially a way for start-up companies to raise start-up capital while circumventing the regulations which control who they can sell stock to. Understand that for the vast majority of these new coins, you are gambling on the hype of a new company.

While I do not believe in the long-term value of most of these new tokens and coins, the space has recently become too big for me to know everything that is going on inside it. I also decided not to buy BTC at $50 because I thought it was too expensive (I knew nothing at the time). I also sold my Ether at $8 because I thought, and still think, it has way too many major obstacles to overcome (centralized, technical issues, ambiguous use case). But now it is well over $200. So while I want to warn you against the risks and dangers in the space, you'll have to decide for yourself what is acceptable.

Before you buy anything, you should understand its use case. What problem does it solve? How does it do it better than everything out there already. Ask yourself if a company could tackle the problem without a coin or token. If so, the coin is essentially worthless, but may rise on hype, until it busts. Read the white paper if one exists. If it is just marketing and hype, the coin is inherently worthless. A true white paper should clearly identify a problem and explain in technical detail how a blockchain solves the problem. If that isn't present, you're not looking at the real thing. But again that hasn't stopped people from making money. Just be aware the music will stop eventually.

Rule #3 - Keep learning

With so many newcomers in the space, the cryptocurrency community will continue to experience significant growing pains. There are no government protections, guarantees or insurance against any negative consequences of the rapid expansion.

If you are new to the space, it's possible that everything looks very shiny and exciting to you. And why wouldn't it? Coins going up 10x, 20x, 100x! It isn't going to be all smooth sailing though. Even within the largest cryptocurrencies there is significant whitewater ahead. If you want to be a savvy crypto investor, you need to understand the trends playing out in the community.

Ethereum and Ripple, for example, both have people and a foundation or company at the helm. That means that if things go belly-up in the ICO space and a lot of Average Joes start losing a lot of money, and there comes a big public outcry for the regulators to step in and "do something", those coins have central points of failure. Companies can be fined or sued out of existence, people can be imprisoned. The coins won't survive. The price certainly won't. And you don't have to hold Ethereum or Ripple for your money to be affected by this. Most of the new coins are built on the Ethereum blockchain.

Bitcoin itself is in the throes of a massive conflict that will come to a head this summer. You should know at least something about the scaling debate User-Activated Soft Fork (UASF) if you want to invest in Bitcoin before September. It's a complex topic that others have written about far more and far better than I can here. It's a highly contentious debate so if you read one opinion on it, you should try to find the counterpoint as well.

Personally, I think if you buy bitcoin now, it's likely to be worth more dollars next year. But it has a good chance of going down by half in the next 3 months. or it could double again. It's an extremely volatile space and in the near term, it is only likely to be more inclined to violent moves. Not for the faint of heart. And the on and off ramps are very few, so if a price drop causes races for the sell exits, its likely to cause as much technical trouble as the recent massive on-boarding has. The infrastructure has not been built out yet to make switching between crypto and fiat currency like buying and selling stock in your online portfolio.

A place to start

Newcomers should learn about the past important lessons in cryptocurrency. Here are just a few examples:

• The Mt. Gox hack
• The DAO hack
• The Bitfinex hack

are examples of why you should never leave money on exchanges. To be clear these were security failures of the networks or exchanges, not vulnerabilities in the currency code.

• OneCoin

is the best example of a scam targeting the non-savvy interested in crypto by throwing the word "blockchain" around a lot.

Welcome to the space

If all of that hasn't scared you off yet, I welcome you to this revolutionary community. At a minimum, stick to these rules. I implore you - be smart. I warn you - be skeptical. And I invite you to learn much more about the real disruptive potential of censorship-proof, decentralized, permission-less, deflationary currency.

 

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