What the crypto crash revealed about our human weaknesses – and how to make better crypto investment decisions
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What the crypto crash revealed about our human weaknesses – and how to make better crypto investment decisions

Last Updated
Sep 12, 2022 3:50 AM
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Introduction

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We’re getting smarter, but we can’t help being dumb.

I know it sounds bollocks. But hear me out.

Our advancement in science & technology has enabled us to understand how the world works, so we could do more with less.

For example, agriculture.

Since 1940, we have increased yields more than 500% while significantly reducing the need for manual labour –because we’ve improved the ways we farm, such as the use of fertilisers, machines and selective breeding to improve the quality of seeds.

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Health and medicine is another area we’ve advanced by leaps and bounds. In the past 200 years, practices like hygiene, sanitation and surgeries has doubled life expectancy from around 35 years to almost 80 years.

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The same goes with our understanding of human behaviour. Psychological science has experienced an unprecedented period of advancement in the past decade, especially with the combination of technologies like fRMI, giving us a better understanding of how we humans think and behave.

While our understanding of ourselves has improved, we’re still the same. We’ve not (yet) manipulated our DNA to increase our intelligence tenfold. Our bodies still age as the same rate; we still cannot sprout wings and fly. We still make the same human mistakes.

It’s not that we’re getting dumber, but that we have a better understanding of how our mind works.

Therefore, techniques used to manipulate ourselves are getting more sophisticated – we don’t intuitively realise when we are being manipulated, until it’s too late.

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For example, it is commonly advised that an investment portfolio should consist of a mix of assets.

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Simply known as Don’t put all your eggs in one basket, it is basic financial advice which we all probably know. We also know that there is risk involved when investing. We know from past recessions – such as the Great Depression and the dot com bubble – that what goes up, must come down. And if it goes up too fast, it’s a red flag.

Don’t put all your eggs in one basket!
Don’t put all your eggs in one basket!

But while it is rising, we can’t help but think of the potential gains if we get in, instead of the probability and likelihood of success, of achieving those gains (neglect of probability).

While everyone is talking about it, we can’t resist the lure to feel a part of a movement, of a revolution that changes the world for the better (aka social proof).

And when it falls and we’ve invested too much, we’re not willing to get out (aka sunk cost fallacy).

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That’s why hundreds of thousands of some of the smartest people made this mistake, putting (and losing) their life savings in projects like Luna.

The innate cognitive biases that is part of how we make decisions as humans, is quite difficult to change.

It’s not that we’re getting dumber, but that we have a better understanding of how our mind works.

Businesses and projects know this – that’s why they know how to build up “hype” to entice everyone to get in.

For example, if you do a quick google of “social proof”, a cognitive bias, and you’ll get articles on how brands can use social proof to market their products.

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Perhaps, it’s ok if a business or project is legitimate and actually trying to build something that actually helps you. It’s not so great when they’re just trying to benefit themselves (i.e. scamming you).

Web3 and crypto was founded with the aspiration of changing the way our markets & economies work.

Today, we’re not there yet. We’ve not figured out how we can trust in a trustless world; in a world where we don’t want others to know who we are, yet we don’t trust people that we don’t know.

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Web3 aims to improve the way our markets & economies work. Join the teams figuring out how to make Web3 work – on CryptoJobs!

But like how agriculture and medicine took years of innovation and trial & error to “learn” and get to where we are today, it will take more time and effort before Web3 gets there too.

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How fast we get there depends on how fast we learn.

I think a wiser approach is to get in, but apply rational frameworks and methodologies to avoid common human cognitive biases that affect decision making.

Here’s how you can make better decisions in Web3:

PS, this article builds upon our past AMAs with:

Disclaimer: This article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. CryptoJobs is not responsible for any lost funds. Please use your best judgment and practice due diligence before investing in crypto, Web3 & DeFi projects.

How to make better Web3/Crypto investment decisions

(1) Understand your risk appetite

Are you someone who enjoys competition? Do you get an adrenaline rush when gambling or even gaming? Do you think that “you can’t expect high returns if you’re not willing to take the risk”?

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If you said yes to the above questions, you’re likely a Risk-Taker.

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Risk-Takers are willing to bet and risk losing something valuable, in return for potential returns or rewards. Therefore, they tend to enjoy the thrill of active trading – in assessing opportunities and timing the market.

If you said no to most of the questions, you’re likely a Risk-Avoider.

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Risk-Avoiders don’t want to lose out but are not willing to lose what they already own. Therefore, they tend to prefer passive investing – buying and holding for the long haul.

But being willing to take risk is different from being able to afford risk.

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Affording Risk: Imagine the worst-case scenario where everything goes wrong and you lose everything, how much can you “lose” and still be ok?

Crypto prices fluctuate wildly by the day. So, it’s best to be risk-avoidant – do not invest more than you’d be OK losing if the market dropped out altogether.

Experts say it’s smart to keep your crypto investments under 5% of your overall portfolio. 

If you have other financial priorities such as paying off high interest debt or saving for emergencies or for retirement, you cannot afford and should not take the risk in crypto – no matter how much of a risk-taker you are. Use more conventional investment strategies instead!

Understanding your risk appetite matters a lot, as it affects how you set up rational systems to manage your emotions and make better [investment] decisions.

Risk Avoider
Risk Taker
Can Afford to Risk
Start Small, within what you’re confident.
Set a Stop-loss to stop once budget/threshold is reached.
Cannot Afford to Risk
Save Up & Soak up. Gain knowledge and capability to start.
Save Up & Remove Temptations that may entice you to take unnecessary risks.

(2) Use frameworks to rationally understand how the ecosystem works

When you’re investing in a Web3 project – be it a cryptocurrency, blockchain or NFT project – you’re not just investing in an asset – but a whole new world.

Web3 businesses/projects can be more complex since there could be an underlying layer of blockchain technology & its ecosystem that you will need to consider.

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Each project layer is racing to be #1 – to get more people who pay to use it.

Therefore, each layer may prioritise different activities to achieve this growth.

Broadly speaking, there are 2 types of growth activities:

  • Performance-driven growth: Improving the product to work better, so that more users choose it.
    • Layer 1: Ethereum (ETH) and Solana (SOL) are two of the largest blockchains. Ethereum built smart contracts based on the need for a platform that could expand the capabilities of blockchain technology. While Solana uses proof-of-history, a unique consensus mechanism, to improve transaction speed and solve scaling challenges.
    • Layer 2: Hubble Protocol adds another layer to their security framework to limit per-token capital outflows, so that if an exploit happens, there is a measure of damage control where the hacker would have to wait to the next interval to exploit it again.
  • Rewards-driven growth: Launching features to encourage users to choose it.
    • Layer 1: Ethereum and Solana runs hackathons and offers funding to hackathon project winners.
    • Layer 2: Hubble Protocol offers 0% interest for minting USDH stablecoin.

Although both types of activities are important for sustainable growth, performance driven-growth is especially important as it means that the project is working to find product-market fit.

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It’s a red flag when a project only focuses on rewards-driven growth – especially if it seems to good to be true:

  • Claims to be celebrities or works with influencers a lot, since these influencers are likely paid or incentivised by the projects in some way, to get people to buy.
  • Promises free money; or promises to multiply your money, without a clear way of how they earn that money.
Remember, there is no such thing as a free lunch.

Web3 and crypto communities are great. We’re pretty close-knit, supportive, and united with a strong team spirit. This loyalty is great if the project has figured out product-market fit (for example, Apple and Tesla fanatics).

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But if the project has not figured product market fit yet, such a team spirit may create an illusion of invincibility, that “bad things won’t happen to us”, and unanimity (if others are of the same opinion, any dissenting view must be wrong) – even if the project hasn’t figured out how to be sustainable and economically viable.

Perhaps we should focus on
Perhaps we should focus on Value > Vibes?

Therefore, it’s important to understand the underlying reasons behind how the ecosystem is designed & built, so that you know what you’re getting into.

For example, usually it is advised to find opportunities in market sectors that are unrelated – aka uncorrelated – so that the price movement of one asset will have low impact on the price movement of another asset. Oil and Gas are correlated assets, while Energy and Real Estate are two non-correlated assets.

Asset 1 is uncorrelated to Asset 2. If you invest in both assets, you’ll have a 50-50 portfolio that “cancels out” each other.
Asset 1 is uncorrelated to Asset 2. If you invest in both assets, you’ll have a 50-50 portfolio that “cancels out” each other.

Now, imagine that there’s an Energy blockchain project that sells excess renewable energy to other network participants through automated smart contracts.

Although Energy may seem uncorrelated to Technology, in this case, this project relies on blockchain technology to work, and therefore is correlated.

It would thus have been important to assess how the underlying blockchain technology works to manage surplus energy contracts.

Consider the underlying Layer 1 technologies when evaluating Layer 2s.
Consider the underlying Layer 1 technologies when evaluating Layer 2s.

How to use 5W1H (Why, What, Where, When, Who and How) to dig deeper

Therefore, don’t blindly follow, but seek to understand how the entire ecosystem works – and use your best judgment and practice due diligence before investing:

  1. Project & Business Model
    1. Is the project solving a real problem? How many people/projects face the problem that this project is trying to solve?
    2. Where does your money go? How does it generate revenue to sustain the project (besides getting more and more investments)?
    3. Why will this solution be better than the others out there?
    4. What are the conditions for buying and selling?
    5. What is the market capitalisation of its cryptocurrencies or tokens that have been mined?
    6. What blockchain platform is the project built on?
    7. How does it ensure security and stability? For example, is there two-factor authentication? Does it have multi-sig to approve transactions?
  2. Background & Team
    1. Why are is the team working on this? What relevant expertise does the team have, in the area they are trying to solve for?
    2. How committed is the team? Is the team working on this full-time?
    3. How transparent and open is the team with the community about the decisions made?
    4. How responsive is the team?
    5. What is the team’s track record in launching and growing projects?
  3. Community Traction & Roadmap
    1. How does the project sustain interest and engage the community?
    2. How successful has the project been in delivering what it promises?
    3. How long does it take to release new features and updates?
    4. Why is a feature prioritised in the roadmap?

How to use Six Thinking Hats to improve decision quality

If you have to decide on only 1 project, how should you think, so that you make better decisions not affected by cognitive biases & emotions, or even peer pressure?

The Thinking Hats methodology by Edward de Bono is a kind of “role-playing” framework to force you to think differently as you put on different coloured hats – so that your decision making process is more well-rounded and balanced.

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Coloured Hat:
Think of:
What it represents:
Questions to ask:
1. White
White paper 📃
Facts, figures, and information. Focus on the available information and seeks objective facts, not what anyone feels about them.
- What information do I have? - What information is missing? - How do I get the information I need?
2. Red
Hot fire 🔥
Emotions, feelings, hunches, and intuitions. Not interested in facts, but rather in people’s feelings.
- What do I feel about this matter right now?
3. Yellow
Warm sunshine ☀️
Advantages, benefits, and savings. Optimistic and full of hope, the yellow hat is also a logical hat, providing reasons behind the hope.
- This is why it can be done. - Why there are benefits. - Why it is a good thing to do.
4. Black
Stern judge 🧐
Caution, truth, and judgement Focuses on critical thinking and is grounded by reality. Think of a stern, skeptical judge or a teacher who isn’t very easily convinced.
- Is it true? - Does it fit the facts? - Will it work? - Is it safe? - Can it be done?
5. Green
Plants growing 🌱
Exploration, proposals, suggestions and new ideas. Think of the energy of growth, fertility, and vegetation. This is the hat for creative thinking, where ideas are put forward actively (not reactively).
- What are the alternatives for action? - What can I do here? - Are there different ideas?
6. Blue
Clear sky 🌌
Thinking about thinking, and the control of the thinking process. Think of the blue sky that is above everything – the overview summaries/conclusions and the process.
- Where am I now? - What is the next step?

What this means when investing in Web3

The crypto crash showed that we’re pretty skewed by biases, emotions and poor reasoning – be it when deciding whether it makes sense to invest in a project, or even when being involved in a project or community.

Especially if you’re involved in a community, it may be difficult to go against the tide and speak out. Therefore, use frameworks like 5W1H and 6 Thinking Hats to think deeper, question assumptions, and make better [investment] decisions.

(3) Apply systematic methodologies to diversify and grow your crypto investment portfolio (instead of “crypto picking”)

We all want to invest in the potential of blockchain technology to disrupt our economy, to be part of a revolution that will change the world as we know.

But being early has its risks and uncertainty – Web3 is still trying to figure out product-market fit.

Like how the App Store launched new apps everyday during its heyday, new Web3 projects across various chains are being launched every other day. We don’t know for sure which projects will prevail. How do we know which ones are worth investing in?

If humans are prone to error due to cognitive biases, poor reasoning and emotions, can you trust yourself in deciding which projects to invest; which baskets to put your eggs in?

To answer this question, we can learn from how systematic methodologies have been used to remove human error, biases and emotions – especially if we don’t have the luxury of time, energy, and money, to assess which projects to pick on your own.

  • How investment models like Index Funds, Mutual Funds & ETFs diversify investment portfolios.
  • How Dollar Cost Averaging methodology helps to achieve stable growth.

How traditional investment models like Index Funds & ETFs diversify investment portfolios

All investors have different ways of deciding whether a project is good or bad – some of us may use technical strategies, while others may rely on fundamentals, and others may even roll a dice to decide.

Also known as “stock picking”, it’s an active form of investment, since investors themselves analyse whether 1 particular business will make a good investment and therefore, should be added to their own portfolio.

Some of these approaches may successfully pick stocks and beat the market sometimes, but consistent growth over time is the true measure of success.

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How well you do in the short run doesn't tell you much about your skill because you can do everything right and still fail or you can do everything wrong and succeed. For activities near the luck side of the continuum, a good process is the surest path to success in the long run.” – Mauboussin in The Success Equation

Most of the time, stock picking is prone to human biases and error. Therefore, index funds and ETFs were methodologies that were developed to move away from stock picking, with a goal of achieving consistent success over time by investing in overall market growth.

Here’s how index funds and ETFs work:

A market index is a tracker that measures the performance of a wider market. For example, the S&P 500 is a stock market index by S&P Global, that tracks the stock performance of 500 large companies listed on exchanges in the United States.

A fund is a pool of money set aside for a specific purpose, such as an investment fund pooled specifically for investment, or funds pooled by a couple for their retirement, or even a public crowdfund to support a particular cause.

Since it’s usually not affordable for investors to purchase individual stocks of the largest companies, index funds were created as a type of investment model that pools together funds, to invest in stocks following a benchmark index.

If you invest in the S&P 500 index fund, you trust that the top 500 businesses in the US will continue to grow over the long term – and therefore you want to invest in all of these 500 top performing stocks in the US market.

Exchange Traded Funds (aka ETFs), like Index Funds, similarly track a specific index. What’s different is its liquidityhow active you can trade (buy and sell) during market hours. Index funds can only be traded at the end of the trading day whereas ETFs can be traded throughout the day.

Another difference is that index funds usually track a specific market, while ETFs often focus on a particular asset type like real estate and commodities.

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Funding-type of investment models like Index Funds and ETFs are easier since regular investors don’t have to pick the best stocks themselves. Of course, you’ll have to pay management fees. The amount depends on the model; how you’re allowed to trade. Therefore, index funds tend to have cheaper management fees than ETFs, since ETFs offers higher liquidity (you can trade during market hours).

Essentially, index funds or ETFs diversify investments among many businesses so that the value of a portfolio is not overly correlated with the fortunes of any one company listed in the index.

3 ways to diversify your Web3 investment portfolio

Instead of “crypto picking” (a spinoff from the word “stock picking”), where you invest all your money and trust in a particular token or crypto project, passive methodologies (adopted by index funds and ETFs) that focus on portfolio diversification would be a much more sensible way to invest in Web3 and crypto, since it removes human biases and emotions.

Unfortunately, the current crypto index fund and ETF market is still maturing, and is not as robust or diverse as traditional index funds or ETFs.

Let’s look at 3 possible ways to diversify your crypto investment portfolio, and how they compare with traditional options:

(a) Investing in Crypto ETFs

Traditional ETFs often focus on particular assets like securities, commodities, and even real estate.

On the other hand, crypto ETFs often represent investments in blockchain companies or digital assets such as ether (ETH) or bitcoin (BTC).

Here are some funds that invest in blockchain companies:

  • Amplify Transformational Data Sharing ETF (BLOK)
  • Siren Nasdaq NexGen Economy ETF (BLCN)
  • First Trust Indxx Innovative Transaction & Process ETF (LEGR)
  • Bitwise Crypto Industry Innovators ETF (BITQ)
  • VanEck Vectors Digital Transformation ETF
  • Capital Link NextGen Protocol ETF
  • Global X Blockchain ETF

Funds that invest in digital assets:

  • Grayscale Digital Large Cap Fund (GDLC)
  • Purpose Bitcoin ETF (BTCC)
  • Purpose Ether ETF (ETHH.TO)
  • Ether ETF (TSX: ETHR)
  • CI Galaxy Ethereum ETF (TSX: ETHX)
  • 3 iQ CoinShares Bitcoin ETF (TSX: BTSQ)

(b) Investing in Crypto Index Funds

Traditional index funds typically track the performance of a diverse, broad range of companies in a market (the S&P 500 tracks 500 leading U.S. publicly traded companies, focusing on market capitalisation).

Meanwhile, since crypto is still maturing, crypto index funds are less diverse (they invest in 10-20 crypto assets). The SEC is also pretty hesitant on approving crypto index funds. Therefore, options are still pretty limited:

  • Bitwise 10 Index Fund (BITW): The Bitwise 10 Crypto Index Fund (BITW) is listed on OTCQX, an over-the-counter (OTC) marketplace accessible through brokerage accounts. Launched in 2017, the BITW fund tracks the Bitwise 10 Large Cap Crypto Index. As a market capitalization-weighted index, it represents approximately 80% of the total crypto market (BitcoinEthereumCardanoSolanaBitcoin CashChainlinkLitecoinPolygonStellar, and Uniswap).
  • CRYPTO10 Hedged (C10): Invictus Capital launched the CRYPTO10 Hedged Index Fund in March 2019. The smart index fund tracks 10 crypto assets; each capped at 15% of the total index value. The fund limits losses through the use of algorithmic cash hedging mechanisms — i.e., it transitions into interest-bearing cash holdings during bear markets and pivots back into crypto once a bull market returns, avoiding drawdowns.
  • CRYPTO20 (C20): Also from Invictus Capital, CRYPTO20 (C20) is marketed as the first tokenized crypto market index fund. The fund tracks a basket of 20 crypto assets that rebalances every week based on market capitalization. To further mitigate risk, no crypto asset can exceed 10% of the total index value. Unlike index funds that issue securities, the CRYPTO20 fund issues a native ERC-20 token called C20, representing the original investment. As a blockchain-based fund, all transactions are part of an immutable record.

(c) DIY by mimicking an index fund

An alternative approach is to construct your own cryptocurrency portfolio mimicking an index, and invest directly in a wide variety of tokens. Similarly, digital asset/crypto market indices track fewer assets and are therefore not as diverse as traditional market indices.

Some digital asset market indices are:

  • Nasdaq Crypto Index (NCI) that tracks performance of blockchains like Bitcoin, Polkadot, and Ethereum as well as projects with bigger market capitalisation such as Axie Infinity and Chainlink.
  • S&P Cryptocurrency Indices, which tracks the performance of a selection of digital assets listed on recognised, open digital exchanges that meet minimum liquidity and market capitalisation criteria.

How Dollar Cost Averaging methodology achieves steady growth focused on the long-term

Following the prices of crypto and timing to market to buy and sell can be pretty nerve-wrecking since crypto prices fluctuate wildly by the day.

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It also requires one to spend a lot of time knowing the market, analysing economic trends. Even then, only 5% (1 in 20!) of professional portfolio managers who try to buy or sell at the “right time” outperform their benchmarks.

If you’re in Web3 or blockchain for the long haul not for short-term gains, Dollar Cost Averaging (DCA) is a simple method that can help to remove the emotion out of investing.

With DCA, you invest a consistent dollar amount in the same investment over a period of time. This compels you to continue investing approximately the same amount regardless of the market's fluctuations, helping you avoid the temptation to time the market.

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How often should you Dollar Cost Average and rebalance your crypto investment portfolio?

If you are investing in a crypto index fund or ETF, or even constructing your own crypto portfolio mimicking an index instead of buying from a fund, you’re managing and rebalancing the portfolio yourself. How often should you DCA and rebalance your investment allocation?

Portfolio rebalancing is like regular maintenance for your investments, like going for yearly health checkups. When you rebalance your portfolio, you’re trying to match your crypto assets allocation to the level of returns you hope to achieve, and the amount of risk you are comfortable taking.

If you are to allocate a smaller portion of your total investment in crypto (experts advise 5%), and if you are to follow DCA, a scheduled approach where you set time points (whether monthly, quarterly, or annually), it will make it easier to get in the habit of rebalancing and avoid being swayed by market movements.

However, unlike a traditional stock exchange, cryptocurrency trading is available around the clock. It’s not necessarily a good thing, since you need to pay fees to the crypto exchange for each transaction, such as network and exchange fees. Crypto exchange fees are usually designed to encourage frequent trading in large transaction amounts. Therefore, fees from frequent, smaller transactions can add up, especially over time.

Therefore, it’s important to consider the fees from crypto exchanges, to decide how often you should dollar cost average your crypto investments.

TL;DR Summary

Web3 is nascent – we don’t know which ones will prevail eventually. We are also prone to human biases and emotions that prevent us from making the right decisions – especially when projects use tactics to manipulate us.

Therefore, a much more sensible way to invest in Web3 and crypto is passive investment. Instead of investing in one particular digital asset and timing the market seeking high returns, investors should focus on diversity, investing in Web3 as a whole – and be in it for the long haul.

Since crypto prices fluctuate wildly by the day, it’s good to remove the emotions from investing in crypto, by investing consistently over a period of time rather than timing the market using Dollar Cost Averaging. Adopting methodologies used by index funds and ETFs that focus on portfolio diversification across an entire market, will also help to manage emotions and biases in crypto investments.

If you choose to invest in crypto index funds, crypto ETFs or even managing your own index fund following an index, take note of what crypto assets & projects the market indices are tracking, looking out for diversity across layers and projects (not just Bitcoin, not just DeFi, not just NFTs).

Also, consider the crypto exchange fees when deciding how much or how often you invest in crypto – especially if you’re looking at using DCA – since transactions fees for smaller amounts can add up over time.

If you have a high risk appetite and enjoy the highs and lows of actively investing in a single project or cryptocurrency, only invest what you can afford to lose. No matter, crypto should only make up a small portion of your total investments. And make sure that you apply frameworks to understand the ecosystem so you know what you’re getting into.

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Even better, join a Web3 startup on CryptoJobs – and be an early innovator figuring out how to make blockchain technology work for the betterment of society.

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