With cryptocurrencies becoming an attractive investment option due to their volatility, many investing services are launched to take advantage of their mainstream popularity. People have the flexibility to choose the platforms and exchanges that are desired to trade crypto at their convenience 24/7.
With so much noise about crypto out there, sometimes it may get tricky to find accurate and trustworthy information to help us make an informed decision when it comes to investing in crypto.
As the influx of newcomers have entered into this space over the past few years, many make costly mistakes that could be avoided with proper research. This article discusses 6 common mistakes that investors might make when it comes to investing in cryptocurrency so that you can build your crypto portfolio the right way.
- Losing Your Private Keys
Cryptocurrency transactions are built on blockchain technology, and transactions are validated using your cryptocurrency private keys. It is extremely important to keep your keys safe and secure, and you should never reveal them to a third party. It is important to note that no trusted party will ever ask for your private keys, and it is meant to be for your safekeeping only.
Once you lose your keys, you cannot reset or recover them, and it also means you have lost access to all your digital assets in the wallet forever. In fact, lost keys are among the most common mistakes that crypto investors make. According to a report from Chainalysis, of the 18.5 million Bitcoin (BTC) mined so far, over 20% has been lost due to forgotten or misplaced keys.
Always make it a habit to keep a hard copy record of your keys on a printed document or a piece of paper to prevent losses from your hot or cold wallets as a backup. Just like losing private keys, investors have also lost their digital assets to crashed computers and corrupted hard drives.
Cyber-attacks by scammers and hackers are also common out there. Scammers can look convincing, especially in the crypto world that is full of uncertainties and changes, people get attracted to offers that bring great returns. To know how to better protect yourself from potential crypto scams, read our article on ‘How to Safeguard Yourself from Crypto Scams’ to learn more.
- Fat-finger Error
A fat-finger error is when an investor accidentally enters a trade order that is not what they intended. One misplaced zero can lead to significant losses and mistyping even a single decimal place can have considerable ramifications.
An incident of this is when the DeversiFi platform erroneously paid out a $24-million fee. Another tale worth mentioning was when a highly sought-after Bored Ape non-fungible token (NFT) was accidentally sold for $3,000 instead of $300,000.
Therefore, always double-check to ensure the transaction details are correct before submitting your confirmation. Also, ensure that you do not mistype a wallet address when sending crypto across different wallets or exchanges. Unlike banks, there is no customer support line to help with the situation and the transaction is not reversible. Once a mistake is made, realistically, there is no rectification that can be done. Therefore, you should always double-check or even triple-check your wallet address before submitting it.
- Emotional Trading
An investor that is new to the cryptocurrency space and is not used to the market volatility of crypto might be affected emotionally when trading, leading to further losses of their funds. Without a clear investing goal, panic selling is common amongst beginners during a significant price correction or rushing into a trade when the price of tokens skyrockets.
Looking at the big picture, if the cryptocurrency is based on solid fundamentals with a strong development team, then there is a pretty good chance that the value of the project increases. Therefore, it is important to do your own fundamental analysis and understand that market fluctuation is a common part of a cycle. All we can do is wait patiently and time entries or exits from the market as best we can.
- Follow One-sided or Biased Sources of Information
Diversify your opinion sources and not just listen to a single source of information that may be leaning towards a certain viewpoint. Regardless of who it is or how legitimate that source may seem, it’s always a good idea to diversify your different news channels to get a clearer picture of the entire market.
- No Diversification or Over-Diversification
Diversification is important to build a resilient cryptocurrency portfolio, especially with the volatility of cryptocurrencies and the many different utilities available in the space. As the saying goes, do not put all your eggs in one basket.
However, one should diversify responsibly because holding many underperforming assets can also lead to significant losses or only meagre gains. One should not be feeling FOMO (Fear of Missing Out) buying coins but instead should understand and research the background of any cryptocurrency before deciding to buy one. You should pay attention to any major macro news that might affect the price movement of cryptos, such as adoption and regulation. As the space is evolving rapidly, taking advantage of new innovations may lead to great investment opportunities.
- Not setting up Take-Profit/Stop-Loss Orders
How much money do you want to make and how much risk are you willing to accept? When do you want to take some profit out or cash out completely (either to re-enter at a lower price point or cash out completely)? Are you investing short-term or long-term?
You should be able to answer the questions above and set up your Take-Profit or Stop-Loss levels accordingly. For example, a Stop-Loss is an order type that enables investors to sell an asset only when the market drops to a specific price, while Take-Profit is an order type that helps investors to sell their asset when the price reaches a certain point. Investors use this to prevent losing more money than they are willing to, ensuring that they do not overtrade and manage their risk level. In several cases, investors have experienced huge losses due to incorrectly setting up their stop losses before asset prices dropped. However, it’s also important to remember that stop-loss orders aren’t perfect and can sometimes fail to trigger a sale in the event of a large, sudden crash before a V-shaped recovery.
Investing in cryptocurrencies requires discipline and proper risk management strategies, as volatile price movements may shake out many beginners who lack an understanding of this space. Therefore, it is important to be responsible for your own cryptocurrency portfolios and define clear investing goals to maximize your gains in the market.
Seek out more information about investment strategies and the cryptocurrency space from reputable sources in order to deepen your understanding to avoid these common mistakes when trading crypto.