This Bad Piece of Crypto Investing Advice Cost Me Hundreds of Dollars

The high APYs on DeFi platforms are not all they seem.

Unfortunately, there's a lot of bad crypto advice out there. It's a relatively new and unregulated industry, and there are not many controls on who's allowed to say what. You'll find everything from celebrities and influencers who encourage you to buy cryptos that have no utility to so-called experts who predict immediate rallies and urge you to buy the dip. The trouble is, you never know who's being paid, whether there's a hidden motivation for the advice, or whether the person is as knowledgeable as they seem.

Some bad advice is deliberate. For example, pump and dump schemes that use social media to push the price up before scammers exit with huge profits. Some of it is simply misguided. But regardless of the intentions, if there's one thing I've learned as a crypto investor, it's to take everything I read with a grain of salt. 

Here's how bad advice cost me hundreds of dollars

At times it feels as if anything is possible in the world of crypto investing. For example, there are DeFi platforms that offer APYs of over 100% if you tie up your tokens and add liquidity. Last November, everything was soaring and I felt like I could do no wrong. So when one crypto YouTuber I admire recommended a high-yield platform, I jumped in without thinking it through. 

The platform promised an APY of 400% to investors who bought their utility tokens and staked them for five years. Some platforms use these kinds of incentives to try to increase overall liquidity and entice people to hang around for the long term. I knew the 400% rate wouldn't last, but I thought I could see why it was being offered. I also thought I'd be able to earn enough in the initial period to at least make back my stake. I was wrong.

Unfortunately, I bought the token at close to its all-time high. It's now worth about 99% less than I initially paid. I made some gains in the first few weeks from the high interest rates, but it was nowhere near enough to cover my initial investment. There's also a small chance that the token will recover if and when the crypto market eventually rallies again. But it's very unlikely to increase by much because the tokenomics don't work.

If a platform pays you ridiculously high rates in return for owning and staking its utility token, you'll usually find it uses that same token to pay those high returns. This means it essentially needs to print more money in order to generate the tokens it is using to pay the high APY. This continually devalues your initial investment. So even if the crypto market hadn't collapsed, I'd have still lost money -- there's no way the project could sustain itself, even in the short term.

How to avoid acting on bad advice

The best way to avoid following bad advice is to question everything you read and know that there's no such thing as free money. Do as much research as you can, and try to double check the information you're being given. Where possible, look at whitepapers and original sources. Don't be put off by technical documents -- the more you persevere with them, the easier it is to read them.

In terms of tokenomics -- which comes from the words token and economics -- research how new tokens will be generated and look at who controls them. If one or two people hold a large majority of the coins or tokens, it’s a red flag. Well-designed projects offer incentives to people who buy and hold a crypto that won't simultaneously water down its value. Some projects also periodically burn tokens or coins, taking them out of circulation to support the crypto's price.

Most of all, have faith in yourself. When you first venture into the world of cryptocurrency, the amount of jargon and technical information can be overwhelming. It's easy to blindly follow the so-called experts who act like they know everything. But the real experts will be able to explain things in ways you understand -- if they can't, it's probably because they don't understand it either. Always make sure you understand what you're buying, no matter how persuasive the advice.