Cryptocurrency Investing for Dummies: Chapter 3 Recognizing the Risks of Cryptocurrencies

Platform cryptocurrencies are generally considered (good/bad) long-term investments because they rise in value as more applications are created on their blockchain.

Good

One of the famous initial hacks was that of Japan-based Mt. _______, the largest Bitcoin exchange, in 2013. At the time, Mt. Gox was handling _______ % of the world's Bitcoin exchanges. However, it had many issues, such as __________________________. As all these problems piled up, in February 2014 the exchange became the victim of a massive hack, where about___________ Bitcoins were lost. Although 200,000 Bitcoins were eventually recovered, the remaining 650,000 have never been recovered.

Gox, 70, lack of a testing policy, lack of a version control software, and lack of a proper management, 850,000

What does "staking" consist of with respect to earning crypto dividends?

Holding a proof-of-stake coin in a SPECIAL wallet

An investor who trades on the hype probably doesn't even have an ______ _____ — unless you call gambling a strategy! You can find different methods of strategy development in Parts 2 and 4.

Investment strategy

REMEMBER: Before falling for the market noise, arm yourself with________ on the specific cryptos you're considering. You have plenty of opportunities to make lots of _______ in the crypto market. Be patient and acquire the right knowledge instead of betting on the current hype.

Knowledge, money

In addition to staking at holding you can earn regular interest payments by participating in crypto ________

Lending

You shouldn't invest in cryptocurrency's by using your _______ savings or taking out a _______.

Life, loan

By definition, _____ risk is the risk of not being able to sell (or ______)an investment quickly at a reasonable price. ______ is important for any ____ _____. The ______ market (my first love) is considered the most liquid market in the world.

Liquidity, liquidate, Liquidity, tradable assett, forex

After the bitcoin bubble burst, and leveled out, lower highs in value of the coin were seen (see chart on opposite of card). What do these lower highs represent?

Lower highs are those mountain-like peaks on the chart. Every peak (high) is lower than the previous one, which indicated a decrease of popularity among market participants.

Besides age, you can group cryptocurrencies in several different ways for diversification purposes. What does it mean to select major cryptocurrencies by transactional cryptocurrencies?

The original category for cryptocurrencies. Transactional cryptocurrencies are designed to be used as money and exchanged for goods and services. Bitcoin and Litecoin are examples of well-known cryptos on this list.

Besides age, you can group cryptocurrencies in several different ways for diversification purposes. What does it mean to select major cryptocurrencies by market cap?

These are top 10 crypto currencies, including at the time of writing of this book options like Bitcoin, Ethereum, Ripple, and Litecoin

Besides age, you can group cryptocurrencies in several different ways for diversification purposes. What are platform cryptocurrencies?

These cryptocurrencies are designed to get rid of middlemen, create markets, and even launch other cryptocurrencies. Ethereum is one of the biggest cryptos in this category.

More and more cryptocurrencies are being introduced every day. In ten years' time, many of these altcoins may vanish while others flourish. This phenomenon is called ___ ____

Vanishing risk

Keep in mind the early bitcoin investors waited ______ to see returns. If you don't have the _______ required to see meaningful returns on your investment, you may need to forget about investing all together.

Years, patience

(With respect to the recent cryptocurrency bubble): Because the cryptocurrency prices had gone up so much, so quickly, the crash was as hard and as speedy. For example, by February 2018, Bitcoin had dropped to the three-month lows of $6,000 from highs of nearly $20,000. The cryptocurrency then started to consolidate above the $6,000 support level, forming lowering highs subsequently. By support level, I'm talking about ________________

a price that the market has had difficulty going lower than in the past.

REMEMBER: When choosing a cryptocurrency to trade, you must consider its liquidity by analyzing its ___, ____, and _____. Lesser-known cryptocurrencies may have a lot of upside potential, but they may put you in trouble because of lack of liquidity.

acceptance, popularity, and the number of exchanges it's been traded on

Crypto dividend payments are becoming increasingly popular among_______, which are the alternative cryptocurrencies besides Bitcoin. When choosing a cryptocurrency for your portfolio, you can consider looking into crypto __________ as well as the potential of __________ gains.

altcoins, dividends, capital

Success follows a bumpy road. Your portfolio may even turn into negative territory at times. However, if you've done your due diligence of __ ___ ___, you must make ____ your friend in order to see long-term profit. See Chapter 18 for full details on long-term investing strategies.

analyzing your investment, time

TIP: You can also offset volatility risk by using ____ _____ _______ on various exchanges. For example, you can set up an order like "sell 65 percent of coin 1," "100 percent of coin 2," and so on if the price drops by 3 percent. This strategy can minimize the risk of _______ and allow you to sleep well at night.

automated trading algorithms, volatility

REMEMBER: The best way to combat the cryptocurrency volatility risk is looking at the ____ _____. Volatility matters a lot if you have a ______-term investing horizon (see Chapter 17) because it's an indicator of how much money you may make or lose over a short period. But if you have a ________-term horizon (see Chapter 18), volatility can turn into an opportunity.

big picture, short, long

When assessing the security risks of a crypto currency, one important safety check (#1) is to assess the cryptocurrency itself. When choosing the cryptocurrency to invest in, you must educate yourself on the ______ protocol and make sure no _______ (or rumors of ______) may compromise your investment.

blockchain's, bugs, bugs

WARNING: Reliable cryptocurrency issuers should take matters into their own hands immediately when a _______ is found. But until they do, you're wise to keep your hands ____ _____ ____!

bug, off their coins

REMEMBER: Although most people invest in the cryptocurrency market for __________ __________, some cryptocurrencies actually offer ______ ________ opportunities.

capital gains, current income

Different assets generate different types of returns. For example, one source of return is the change in the investment's value. Also, when you invest in the stock market or the forex (foreign exchange) market, you may generate an income in the form of dividends or interest. Investors call these two sources of return _________ gains (or _______ losses) and _________ _________, respectively.

capital, capital, current income

REMEMBER: To date, most digital currencies aren't backed by any _______ ______, meaning each country has different ___________.

central government, standards

The most popular reason for crypto investing is to see gains in the_______' value. Some people associate the coins with ______ ______ such as gold. Doing so makes sense because, just like gold, a _______ ________ is available for most cryptocurrencies, and one way to extract many of them is to mine.

coins, precious metals, limited amount

Income is a lesser-known type of return in the cryptocurrency market. Income is generated from something called _________ __________.

crypto dividends

Another key factor in cryptocurrency liquidity is the stance of countries on ____ _____. If the authorities are able to define issues such as ____ ______ and crypto taxes, more people will be _______ using and trading cryptocurrencies, which will affect their liquidity.

cryptocurrency regulations, consumer protection, comfortable

Exchanges are where you trade the __________ ________.You need to make sure that your trading host is _______ and ______. Countless numbers of security incidents and data breaches have occurred in the crypto community because of the exchanges.

cryptocurrency tokens, trustworthy and credible

REMEMBER: You must have an _______ fund before creating an investment portfolio, let alone adding cryptocurrencies to it.

emergency

The most common reason many traders lose money online is the fantasy of _____ ____ ______. I can say with confidence (verifiably) that the vast majority of my long-term students made money, and in many cases a lot of money. The key has been ______.

getting rich quick, patience

One of the initial attractions of cryptocurrencies was their lack of regulation. In the good old days crypto enthusiasts didn't have to worry about governments chasing them down. All they had was a white paper and a promise. However, as the demand for cryptocurrencies grows, _____ ______ are scratching their heads on how to keep up — and to not lose their shirts to the new economic reality.

global regulators

In my investment education courses, I spend a lot of time speaking about risk and how everyone should approach it __________. What may represent high risk for me may not be as risky for you due to our unique lifestyles and financial circumstances.

individually

On the bright side, as cryptocurrency investing becomes more available and acceptable, the market may become more ______. The increase in the number of trusted crypto _____ will provide opportunity for more people to trade. Crypto ______ and _______ _____ are popping up, helping raise the awareness and acceptance of cryptocurrencies in everyday transactions.

liquid, exchanges, ATMs and payment cards

Regarding the subject of regulation of cryptocurrency generating risk, the regulation event risk doesn't necessarily mean that the cryptocurrency market is doing poorly. It just means the _____ _____ reacted to an unexpected announcement. In 2018, every seemingly small regulation announcement drove the ______ of many major cryptocurrencies and created a ton of _______.

market participants, price, volatility

Exchange hacks still happen almost on a ________ basis.

monthly

What is the main reason why cryptos have a lot of hype that can lead to risky investments?

most people don't know about what they're investing in; they just end up listening to the crowd.

Earning dividends in the crypto market can get a bit more complicated than traditional dividends. Different currencies have different _______ _______ and their own _______ and _______. However, the concept still remains the same.

operating systems, Rules, regulations

When the liquidity is low, the risk of _____ _______ also comes into play. One big player can easily move the market to his or her favor by placing a ____ _____.

price manipulation, massive order

You can divide the cryptocurrency regulation risk into two components: the _____ ____ risk and regulation's ____ itself.

regulation event, nature

At the time of writing, there are no global cryptocurrency _____, so existing regulations are ___ ____ ____ _____. In some countries (such as Japan and the United States), for example, cryptocurrency exchanges are legal as long as they're registered with the ___ ______.

regulators, all over the board, financial authorities

Getting educated about ______ puts you right on top of your game.

risk

Regarding the cryptocurrency bubble of 2018: "just imagine investing in the market when the prices were up and watching the value of your investment going lower and lower. That's one of the major _____ ______ in any type of investing."

risk factors

TIP: Before choosing an exchange, take a look at its ______ _______ on its website. Check on whether it participates in any bug _______ programs to encourage safety. And, of course, ask the ______ _______ about the exchange. In Invest Diva's Premium Investing Group, we keep an eye on the latest developments in the market and keep our members informed about any shady activities. So feel free to stop by https://learn.investdiva.com/join-group!

security section, bounty, right people

Traditionally, dividends occur when public companies distribute a portion of their earnings to their _________. Traditional types of dividends include cash _________, _______ of _______, or other ______.

shareholders, payments, shares, stock, property

Many investors consider cryptocurrencies to be assets even though they're technically currencies that can be used in _________. People buy these currencies in hopes of selling them when the prices ________ more.

transactions, rise

Volatility risk is essentially the risk in ____ ____ _____.If you aren't prepared, you can lose the money you invested in the market.

unexpected market movements.

If you live in the United States or are a U.S. citizen, tax risk involves the chance that the authorities may make ________ changes in tax laws, such as limitation of _______, increase in ____ _____, and elimination of tax exemptions.

unfavorable, deductions, tax rates

The final round of security check is all in your own hands because what kind of crypto ________ you use is entirely up to you. Though you don't physically carry your crypto coins, you can store them in a ____ _____ _____. You actually store the public and private ______, which you can use for making transactions with your altcoins, in these wallets as well.

wallet, secure physical wallet, keys

TIP: The crypto community refers to big players as _______. In the cryptocurrency market, ____ often move___ ____ by using their huge capital.

whales, whales, small altcoins

IMPORTANT: You may be able to find out about the nature of the cryptocurrency's protocol on its _____ ______ on its website, an official document that the crypto founders put together before their ICO (______ ______ ______), laying out everything there is to know about the cryptocurrency. But companies are unlikely to share their ___________ in their white papers. That's why reading reviews on savvy websites like Reddit and my site, InvestDiva.com, can often be your best bet.

white paper, initial coin offering, shortcomings

REMEMBER: One key problem the cryptocurrency market faces when it comes to diversification is that the ____ _____ appears to be extremely correlated. The majority of cryptocurrencies ___ ____ when the market sentiment turns bullish (upward), and vice versa. Despite this tendency, you can diversify away risk in a crypto-only portfolio by ____________________________________.

whole market, go up, adding more crypto assets to your portfolio

TIP: At the time of writing, some dividend-paying cryptocurrencies include: (5 examples). Find out more about these in Chapter 8 of the book

NEO, KuCoin, BridgeCoin, Neblio, and Komodo.

Besides age, you can group cryptocurrencies in several different ways for diversification purposes. What are application specific cryptocurrencies?

One of the trendiest types of cryptos, application-specific cryptocurrencies serve specific functions and solve some of the world's biggest problems. Some examples of such cryptos are Vechain (used for supply chain applications), IOTA (Internet of Things applications), and Cardano (cryptocurrency scalability, privacy optimizations, and so on).

As of 2018, the U.S. Internal Revenue Service views Bitcoin and other cryptocurrencies as ______, despite the fact that they have the word currencies in them. Therefore, transactions using altcoins are subject to ___ ___ ____.

Property, capital gains tax

The sad truth about any type of investment is that the greater the expected ________, the greater the ______.

Return, risk

Because cryptocurrencies are considered riskier than some other assets, they may also provide higher ______. The relationship between risk and return his call the __ ____ ___ ____.

Returns, risk return trade off

You must consider your risk tolerance, understand the different sources of cryptocurrency ______, and then develop an investment strategy that's suitable for _______ — just you, not anyone else — because you're unique, and so is your _____ ________.

Risks, you, financial situation

REMEMBER: To minimize the vanishing risk, you need to analyze the fundamentals of the cryptocurrencies you choose to invest in. Do their goals make ______ to you? Are they __________ that will continue in the years to come? Who are their ______? You can't vanish the vanishing risk entirely (pun intended), but you can eliminate your exposure to a sudden bust. Check out Part 2 for more on fundamental analysis.

Sense, solving a problem, partners

Besides age, you can group cryptocurrencies in several different ways for diversification purposes. What are privacy cryptocurrencies?

Similar to transactional cryptocurrency's, they are heavily focused on transactional security and anonymity. Examples include Monero, Z cash and Dash

What are the 2 most popular ways to earn crypto dividends (at mentioned in the book)?

Staking and holding

What is the definition of a blockchain's "protocol?"

The common set of rules that the Blockchain network has agreed-upon

Although you may have heard of Bitcoin the most, it wasn't even among the ______ best-performing crypto assets of 2017. Bitcoin's value grew by more than 1,000 percent, but other, lesser-known cryptocurrencies such as Ripple and NEM were among the biggest winners, with a whopping 36,018 percent and 29,842 percent growth, respectively. Where did Bitcoin stand on the performance list? ______! These returns made investors and noninvestors alike super excited about the cryptocurrency market.

10, 14th

When you engage in crypto lending you can earn up to ______ interest on your cryptos by allowing companies like Celsius Network to give out ___________ to the general public against cryptos.

5%, loans

REMEMBER: Cryptocurrency investing isn't a ____ ____ ___ ___

Get rich quick scheme

What does "holding" consist of with respect to earning crypto dividends?

Buying and holding a crypto in ANY wallet

REMEMBER: _________ exchanges are the most vulnerable to attacks. Flip to Chapter 6 for methods to spot red flags in cryptocurrency exchanges.

Centralized

What are the various types of crypto hype that can cause risky behavior (including obnoxious abbreviations for these terms)?

FOMO (fear of missing out: e.g. you see a massive surge in a crypto you are ignorant of and hurry in to get your hands on it) FUD (fear, uncertainty, and doubt: e.g. a financial pundit called Bitcoin a fraud in 2017, stating that he regretted saying that in 2018 after the surge in value) ATH (claims that a currency is at an all time high) Bag holder: investors who bought a bunch of coins and held onto them too long, and now they're worthless BTFD ("buy the f*cking dip"—in order to avoid being a bad holder you have to BTFD)

A great example of the idea of remaining patient with [at least well thought out investments] is the crash of 2008. Almost all markets around the world, including the U.S. stock market, dropped like a hot rock because of economic issues such as the mortgage crisis. Most people panicked and started to get out of their investments with massive losses. Had they given it some (well, a lot of) patience, they would've seen their portfolios in positive territory in around _____ years. By 2018, they would've more than _____ the returns on the very same investments.

Five, doubled