The incredible growth of cryptocurrencies and colorful stories about the first holders who made a fortune by buying a coin for a small amount attract many newcomers to the market – people want to repeat success stories. However, you must be careful not to make mistakes that will lead to the loss of funds. In this article, we will explain in detail what to avoid when investing in cryptocurrencies and how to save your money and nerves.
This is the first and most important point for novice crypto investors. The existing problems of regulating cryptocurrencies open up a wide space for scammers who come up with various sophisticated methods to steal money from unscrupulous investors: from phishing sites to ICO scam projects. The same applies to cryptocurrency exchanges. Hackers often create fake exchanges to deceive buyers and sellers of cryptocurrency.
How to protect yourself from fraud
Just follow the simple rules and you will save your money. Carefully check the domain address – it must be original. Using phishing sites, hackers can steal credentials from a wallet or crypto-exchange, and then steal funds from them. Enable additional 2FA protection to prevent account theft.
Under no circumstances should you pass your wallet private keys, passwords, or seed phrase. They can be used by hackers to gain access to funds. If someone presents themselves as a manager of a crypto exchange or other official and demands to send private information, then be sure that you are facing a fraudster.
Carefully study any ICO project before investing in it. Pay attention to the activity of the founders, the roadmap, and how the leaders fulfill their obligations to the community. Read expert reviews and recommendations. If you do not want to study projects in detail, it is better to give preference to well-established cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum, Ripple and others. Information on coins can be found on the well-known website CoinMarketCap. (https://coinmarketcap.com)
To avoid falling for a fake exchange, use services for monitoring exchanges, such as Changevisor (https://changevisor.com/). The service allows you to find exchanges in the areas of exchange that the user is interested in, for example, BTC to PayPal USD or Advanced Cash to Ethereum. Changevisor will display a list of available exchangers for the selected payment method, sorted by the best offer.
The service provides only reliable exchangers that have been verified by many users. Directly on the Changevisor website (https://changevisor.com/) you can read customer reviews to check the quality of the exchanger.
Don’t ignore the fundamentals
Fundamentals are the main driving force of the market. The crypto market is subject to the same laws and rules as traditional markets. You need to track news and important events that may affect the value of crypto assets. For example, a project that was considered innovative today may lose ground in a year, and more promising projects will take its place. One such example is the LISK cryptocurrency. In 2017, this cryptocurrency was one of the leaders of the CoinMarketCap list. But now investors are showing little interest in it.
The investor needs to study the basics of the market, understand how certain factors affect the dynamics of crypto assets. For example, Bitcoin is often called a “crypto market indicator”. It often happens that when the rate of the first cryptocurrency falls, the price of altcoins collapses even more, and during the flat of bitcoin, altcoins begin to grow rapidly.
On the Internet, it is not difficult to find valuable guides and courses on the basics of investing, which are freely available. There are also forums and various services that provide Analytics. Reading the Analytics of other investors, you can learn a lot of useful information and master the theoretical base.
Don’t make typical mistakes
Emotions can lead to negative results. Often newcomers, looking at the active growth of the cryptocurrency, begin to buy a crypto asset at the peak of the price, mistakenly believes that it will grow further. And after a strong correction, they sell the cryptocurrency much cheaper, which then increases in price again. Big players, or whales, as they are also called, manipulate the market, using the Pump & Dump scheme well-known to traders. Investors make large purchases by artificially inflating the price, which encourages other investors to actively buy cryptocurrency in order to extract a quick profit. As soon as the buyers’ strength runs out, the whales crash the price, leaving buyers with losses.
If you make a mistake – this is not a reason to get upset. Mistakes are made even by professional traders, and no one is immune from them. Learn valuable experience from your mistakes, carefully analyze your trades and do not give in to the main enemies of the investor: fear and greed.
Don’t forget about risk management
Diversification is one of the main rules of investment. When an investor buys assets, they collect a portfolio of various cryptocurrencies. This allows for better risk management. This method is also used by large hedge funds. If you invest the entire amount in just one cryptocurrency, then your capital will depend only on it.
You need to choose the optimal number of cryptocurrencies (5 – 10 will be enough) for investment and distribute funds between them depending on the risks. The higher the volatility (the amplitude of price fluctuations), the higher the risks, respectively, but the yield will be higher. The share in the portfolio is determined based on liquidity. For many investors, the main part of the portfolio is made up of Bitcoin and Ethereum as the largest cryptocurrencies. Their share can reach 50% – 70%. For other coins, a smaller part is allocated – from 5% to 10%. These are only approximate figures. Each investor determines them for themselves, taking into account their risk profile.
When managing risks, you should also consider the correlation between cryptocurrencies. For example, Bitcoin forks often follow the price of the main cryptocurrency. Therefore, when bitcoin falls, all your portfolio can drop significantly. To better diversify risks, you need to “dilute” the portfolio with less correlated or inversely correlated crypto assets.
And also: don’t forget about the other basis of risk management, according to which you should not invest more money than you are afraid of losing. You can’t bet on cryptocurrencies all your savings. Moreover, you should not take a loan for this. It is necessary to provide a “financial safety cushion”, and investment should not worsen the current quality of life and lead to serious financial problems.
Don’t follow instantaneous impulses
Another common mistake of inexperienced investors is impulsiveness. Investing in the long term can bring high returns. Therefore, an investor is primarily a marathon runner, not a sprinter. Newcomers may be tempted to quickly dispose of an asset as soon as it increases in value. This bears fruit in the short term. But this way you can miss a more global trend that can bring several times more profit.
In addition, regular transactions require greater concentration and stress tolerance. Large players prefer quiet investing and spend less time trading, freeing up this time for their favorite activities. In addition, trading carries increased risks. The more often a trader makes deals, the higher the fee costs, which consumes part of the profit or increases losses.
In this article, we have reviewed the main mistakes made when investing in cryptocurrencies. The main thing that crypto investors should avoid is reckless actions and exceeding acceptable risks associated with uncontrolled risk management and the use of low-liquid instruments. You should take full responsibility for your actions and carefully analyze them, and not blindly follow other people’s advice and recommendations.
Avoid these mistakes in order to get a positive investment experience and constantly learn – the effectiveness of crypto investment will directly depend on this. It is not possible to achieve 100% profitable trades, but as your experience increases, the number of losing trades will decrease and your capital will grow faster if you follow important investment rules.