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Cryptocurrency Scams Are Still a Threat: 3 Safe Ways to Invest in Cryptocurrencies
Some basic rules can help investors avoid cryptocurrency scams.
Bitcoin (Bitcoin 1.35%) may be on the verge of becoming truly mainstream, but the cryptocurrency market continues to see no shortage of new scams. And it doesn’t matter how big or sophisticated an investor you may be. Even billionaires and longtime savvy investors can be fooled by cryptocurrency scammers.
The good news is that you can take several key steps to safeguard your cryptocurrency investments and avoid most crypto scams. Let’s take a closer look.
Use ETFs whenever possible
Arguably, the safest way to invest in cryptocurrencies is to only invest in exchange-traded funds (ETF) for specific cryptocurrencies. You can buy and trade these ETFs the same way you would a tech stock, so there’s no learning curve involved. There is no need to open new accounts. Plus, you can rest easy knowing that every ETF has a seal of approval the Securities and Exchange Commission (SEC). This helps explain why the new Spot Bitcoin ETF they were so popular.
As new ETFs launch for other cryptocurrencies besides Bitcoin, you will be able to slowly diversify your cryptocurrency holdings. For example, the SEC recently approved new ETFs for Ethereum (ET 0.27%), so they will arrive soon. And some have suggested it Solana (SOL -0.94%) could be the next cryptocurrency in line after Ethereum to get its own spot ETF.
Choose a reliable cryptocurrency trading platform
For many investors, however, an ETF-only strategy is likely too limiting. You will need to find a safe place to buy and sell your cryptocurrencies and cryptocurrency exchanges like Global Coinbase (CURRENCY -3.77%) are a popular choice.
From CoinBase is regulated by the SEC, has some strong safeguards built in. For example, Coinbase will not list a cryptocurrency for trading unless it meets certain key criteria. And since Coinbase is a publicly traded company, it has to run a squeaky clean ship and provide audited financial statements. Coinbase also offers best-in-class security to protect its cryptocurrency deposits, so you don’t have to worry about a cyber heist.
But Coinbase is certainly not the only option when it comes to cryptocurrency trading platforms. There are literally dozens of possible options. The Motley Fool Ascent has analyzed many of them and determined what they are the best to buy Bitcoinas well as what they are best to buy altcoins (i.e., all cryptocurrencies other than Bitcoin).
It’s important to do your due diligence here. Remember: Everyone thought FTX was a reliable cryptocurrency exchange until it collapsed in November 2022. In hindsight, we now know that former FTX CEO Sam Bankman-Fried was using customer funds for proprietary trading while at the same time lining up for celebrity endorsements.
Establish clear investment rules
Finally, it is important to establish some initial rules about which cryptocurrencies you will invest in and which cryptocurrencies you will not invest in. No surprise here, but the cryptocurrencies that are most likely to be the target of a scammer are those with small market capitalizations and limited trading liquidity.
Image source: Getty Images.
As a general rule, you should avoid cryptocurrencies that are not offered for trading on major cryptocurrency exchanges. And you should avoid cryptocurrencies that are below a certain market capitalization threshold. Right now, a sensible target would be a market value of $1 billion. This would give you access to the top 100 cryptocurrencies ranked by market capitalization. But if you’re particularly risk-averse, you might consider increasing that figure to $5 billion, which will limit you to just the top 25 cryptocurrencies.
Perhaps the best advice here is to avoid any cryptocurrency that attracts get-rich-quick investors. Unfortunately, this means meme coins it should be off your investing radar. While popular meme coins may increase in value for a short period of time, their long-term appeal is very limited. The situation is even worse for meme coins with small market capitalizations, which are often subject to extreme market manipulation pumping and draining schemes.
Be a more educated investor
Ultimately, the more educated you are about cryptocurrencies, the better off you will be when it comes to avoiding classic crypto scams. For example, if you plan to hold crypto tokens in a blockchain walletyou need to familiarize yourself with the basics of blockchain wallets. This way, you won’t be tricked into giving yours away cryptographic keys to an unscrupulous scammer who will use this information to raid your account.
Fortunately, cryptocurrencies are becoming more and more mainstream, and with each passing year, the cryptocurrency market is starting to look less and less like the Wild West. As the regulatory environment tightens and large Wall Street investors get involved in the cryptocurrency world, the risk of scams will likely decrease over time. But until that happens, it’s definitely worth taking the time to explore the safest ways to invest in cryptocurrencies right now.
Domenico Basulto has positions in Bitcoin, Ethereum and Solana. The Motley Fool has positions and recommends Bitcoin, Coinbase Global, Ethereum and Solana. The Motley Fool has a disclosure policy.