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If you plan on investing in cryptocurrency, there has never been a better time to do it than now. This advice doesn’t just go for cryptocurrencies but all digital assets. Investors can now buy and sell coins through online brokers, centralized exchanges, and even decentralized exchanges. Such features help them avoid the high fees you typically have when dealing with a traditional financial institution.
One of the main draws of cryptocurrencies is that they function in a decentralized fashion. This means they provide a new method for conducting value transactions between individuals worldwide. However, it also means they do not involve any reputable third party to safeguard your funds. Most countries still don’t have laws in place regarding the trade of digital assets. Your digital assets are your responsibility, and nobody is obligated to help you if you lose them. For this reason, we are here to discuss mistakes to avoid when investing in cryptocurrency.
We will look at some of the most typical errors that cryptocurrency investors and traders make. Additionally, we will look at how you can avoid excessive losses. This way, you’ll be able to use more rational strategies to maximize your profits from trading in the cryptocurrency market. We believe you should be aware of this because cryptocurrencies have altered how we use cash these days and the trajectory of digital payment. With that said, now we will cover some of the more significant mistakes you can make.
1. Failure to Educate Yourself About Cryptocurrencies
We understand that it is tempting to jump right into investing in crypto. This is mostly because there are a lot of crypto enthusiasts who would have you believe it’s not that complicated. While you can purchase a cryptocurrency and hope for the best, you will have a hard time getting a good return on your investment unless you do some initial research. That being said, the truth is that you need to know a lot if you don’t want to make mistakes when investing in general and cryptocurrency. For example, there is a lot of jargon in the crypto world, which may be tough to grasp. Some of it you’ll learn as you go, but before you start investing, make sure you understand the fundamentals, which are:
- Cryptocurrency exchanges: These exchanges function similarly to traditional stock exchanges in that they facilitate the buying and selling of cryptocurrencies instead of stocks and bonds. In contrast to physical stock markets, cryptocurrency exchanges operate nonstop, around the clock online.
- Market cap: refers to the overall value of a cryptocurrency. The price per coin is determined by multiplying the total number of coins in circulation by the cryptocurrency’s price. It’s a standard by which you can compare various digital currencies in terms of their overall worth or size.
- Bull markets and bear markets: The terms “bull market” and “bear market” are taken directly from the language of conventional stock markets. Traders in a bull market are optimistic about the future of investment. This means they will keep buying as the price rises. Those in the bear market are fearful and will sell as the price falls.
- Sell orders: are instructions given by traders to a platform to liquidate their cryptocurrency holdings if its price falls below a certain level. In a conventional market, this process is called a “stop loss,” and we will cover this process in more detail soon.
2. No Sufficient Preparation Before Investing
Even if people are not new to investing, sometimes they underestimate how much preparation is necessary to start safely investing in cryptocurrency. To minimize risk, you need to have clear goals in mind. It would be best to think about how much money you want to make, how long you are willing to stay invested, how well you handle risk, etc. According to the experts from relosmart.asia, this is the only way to ensure you don’t suffer any significant losses. Some prominent cryptocurrencies, such as bitcoin and Ethereum, may even appreciate in value. Sure, there are ups and downs, but when you invest for the long term, the returns are generally good.
On the other hand, investing in cryptocurrencies with a low market value may provide prospective profits. However, if you invest at a higher price, you may have to wait a long time for a significant return, assuming you ever recoup your investment. Therefore, think about what you want to achieve and track the currency you plan to invest in.
3. Investing Before Conducting Coin Research
After you educate yourself about cryptocurrencies and set your investment goals, the next thing you need to do is figure out which coins will be best for you. That being said, when an industry flourishes, it’s normal for crooks to attempt to profit from investors, and the crypto sector is no different. Scam coin manufacturing is a hugely popular fraud right now. This scam is commonly known as a “pump and dump” scheme. Scammers typically create a new coin and heavily promote it to potential investors. They promise low risk and high reward, and once the coin’s value reaches a certain level, the scammers withdraw all of the funds, leaving the investors high and dry.
Even though some of the more popular cryptocurrency exchanges are trying to prevent them, these types of scams have occurred several times in recent history. Scams always happen since gullible people are looking to make a fast buck. And in one particular case, the coin was worth more than $3 million. Unfortunately, more novice investors are more likely to fall for frauds like this, and millions of such people are out there. To prevent buying a risky coin, it’s usually a good idea to properly investigate the organization to understand precisely who you’re working with.
Other Cryptocurrency Scams Include
- Cloud multiplier scams: These scams usually involve Emails and texts from con artists offering an “investment opportunity.” Usually, these scammers offer to double or triple the coin you send them. However, once you send your currency to the specified wallet, they take it and leave. What makes this even worse is that this transaction is considered legitimate. Therefore there is nothing you can do to get that money back other than to ask the scammer to return it.
- Malicious wallet software: Any cryptocurrency funds stored in wallets downloaded from untrusted sources, such as those found on Google Play or the App Store, could be stolen by malicious actors. Best practices for cryptocurrency recommend using only well-known wallets like Ledger, Trezor, Exodus, or MetaMask.
- Fake coins: It can be confusing to determine which cryptocurrency is legitimate among the hundreds or thousands available today. When people put their money into counterfeit coins, fraudsters often make off with their identities and savings. Do your research on coins before you buy them; don’t rely on the advice of just one source.
4. Taking One-Sided Advice
Famous personalities often sway people’s investment decisions, whether from social media or reputable financial publications. If you want to make sure that you are making the best possible decision, you need to consider multiple points of view. Unless you are working with a professional financial advisor, the best thing you can do is ask around or consult various resources regarding the coin you wish to invest in, your investment strategy, the risk profile, etc. It is always preferable to gather multiple perspectives rather than getting knowledge from a single source of information. It will give you a better understanding of the crypto world and a clearer picture of the market position. You must acquire information since what may be a good solution for one person may not be acceptable for another due to differences in risk tolerance or investing objectives.
5. Not Comprehending the Lack of Security Associated With Cryptocurrency
The main reason scams abound in the cryptocurrency space is that it is largely unregulated. Since the transactions are anonymous, you can only identify someone in the crypto space via their wallet. And, as we’ve mentioned already if you get scammed, there is nothing you can do to get the lost funds back. Another significant issue is the high volatility of the cryptocurrency market. Many investors approach the market thinking that the price of coins will always increase over time. However, this is not the case. Recently, several coins have lost over half of their value in just a few days. Therefore, you must mentally prepare for these risks before investing in cryptocurrency.
6. Investing More Than You’re Ready to Lose
Only investing how much you can afford to lose is a good idea, regardless of the type of investment. This is especially true for volatile or extremely risky investments, which can rise and fall extremely quickly. Moreover, cryptocurrencies are one of the most volatile assets to trade. Since cryptocurrency is volatile, such incredible profits may come with the danger of massive losses. The more volatility and risk, the smaller the cryptocurrency’s market cap. The amount of return you will earn will depend on your unique experiences and risk tolerance. As a result, ensure you understand crypto’s dangers and worst-case situations. Always remember that cryptocurrencies are not value-generating assets. Although their value may go up or down over time, coins do not produce any additional value themselves.
7. Investing in Only One Kind of Crypto
Using a single cryptocurrency at the outset is perfectly acceptable. One must always begin somewhere. However, people frequently make the mistake of relying on only one coin. As the most widely used digital currency, Bitcoin has experienced a meteoric rise in popularity over the past few years. As a result, many people have decided to put all their money into buying that particular coin. However, once Bitcoin’s value began to fall at the end of last year, most of these people suffered significant financial losses.
Putting all of your cryptocurrency eggs in one basket, no matter how promising the coin may seem at the moment, could be risky. Therefore, if you are learning about investing in cryptocurrency, putting a large sum of money into a single coin is not a good idea. As mentioned before, educating yourself before making any significant purchases is best. For this reason, it’s a good idea to familiarize yourself with various currencies.
8. Investing in Too Many Different Kinds of Crypto
On the opposite side of the spectrum from investing in a single coin, there is over-diversification. Diversification is essential for constructing a sustainable cryptocurrency portfolio, particularly given the space’s extreme volatility. However, due to the abundance of options and the widespread pursuit of increasingly large returns, cryptocurrency investors frequently over-diversify their holdings, which can have disastrous consequences. Many failing assets an investor owns could lead to massive losses if the investor is over-diversified. You should only diversify into cryptocurrencies where the intrinsic value is clear, and you should understand the different types of assets and how they will likely perform in different market scenarios before doing so.
9. Not Establishing a Stop-Loss Mechanism
As mentioned earlier, investors can use a stop-loss mechanism if the market falls below a specific price. This allows them to liquidate their holdings quickly and minimize losses. Investors use this to ensure they never lose more than they can afford. Sometimes, it also allows them to get their money back, plus a little extra. Many investors had lost a lot of money because they set stop losses too early, just before the value of their assets plummeted. However, it is essential to remember that stop-loss orders aren’t perfect and may fail to initiate a sale in the event of a sudden, drastic decline. Still, the importance of using stop losses to protect capital during a market crash cannot be overstated.
Conclusion
Risk and uncertainty characterize crypto investment and trading. Being cautious, patient, and knowledgeable can get you far in any kind of trading. However, due to the decentralized nature of blockchain technology, cryptocurrency investors need to take the time to research the market and learn from their mistakes before putting their money at risk. Hopefully, now you know what mistakes to avoid when investing in cryptocurrency.
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9 Mistakes to Avoid When Investing in Cryptocurrency
