Everybody knows that whenever you plan to invest in something, you must understand what you are getting into before you do it.
In other words, thorough research should be done on whatever security, whether it is stock, bonds, or cryptocurrency, that you are planning to invest in because not doing so might put you in a situation where you are seeing your portfolio losing money. There is nothing you can do about it, as it might be too late to salvage anything.
We are going to discuss some of the most common mistakes an amateur or an initial investor commits when they are entering into the dynamic world of cryptocurrency.
The purpose of pointing these mistakes out is to make sure that you try and abstain from doing or repeating such mistakes because it will help your cause in gaining financial independence.
1. Lack of Research
The very first thing you must do before investing in the crypto market is to learn what it is, how it operates, what is the underlying technology behind it, and what aspects make it unique when compared to the traditional stock market.
After you go through these initial steps, you should research what specific cryptocurrencies you want to invest in. A high price of a crypto asset like Bitcoin would entice you to put your money on it, but it doesn’t mean that you can expect similar gains from it in return.
You must look at what use cases a particular cryptocurrency serves, the blockchain it is built on, what protocols the blockchain is using, and what is the general sentiment of the market towards it.
Entering the crypto market without any foundational understanding of the market is the most common pitfall for new investors.
Investors are also prone to ignore the fundamentals of blockchain technology, the underlying principles of various cryptocurrencies, and the overall dynamics of the market. If you have not gone through such steps before investing in a particular cryptocurrency, then you are preparing yourself to face huge financial losses.
While the statement might sound harsh, the alternative of losing your funds is a more brutal reality that you should avoid at all costs.
To mitigate such risks, new investors should allocate time to study and grasp the core concepts of blockchain, explore different cryptocurrencies, understand their use cases and potential, and delve into market analysis.
Read about different cryptocurrency projects from various proven sources whose reputation is not in question. These days, you can also follow video content of such experts who know what they are talking about.
Also, find time to read the whitepapers of different crypto projects, as it would provide you with much better information about what a particular cryptocurrency project is all about.
Following such steps will help you make better and more informed decisions.
2. Investing Without a Plan
Another basic mistake that new investors are susceptible to making in the crypto space is diving in without a well-defined investment strategy.
Instead of making a well-defined investment plan that also highlights the proper steps investors should take before investing in the crypto space, they follow the market hype and think that what the consensus is might also be better for them.
However, things are not as straightforward as they might look in the crypto market. Instead of devising a sound strategy, investors tend to get carried away by their emotions and commit mistakes that they later regret.
A well-thought-out investment plan will serve as a roadmap for you. It will help you navigate the twists and turns of the volatile crypto market with ease, as you will be better equipped to answer whatever challenges the market throws at you.
Going into crypto investing without devising such strategies will push you into a financial pitfall from which you may not recover easily. It might deviate you from your objectives very quickly, especially during times of market fluctuations, which might force you to react impulsively.
To rectify this, new investors should consider various aspects when formulating their investment strategy. This includes defining clear investment goals, assessing risk tolerance, setting an investment budget, and diversifying their portfolio. Moreover, having a clear entry and exit strategy for different assets is crucial to prevent emotional decision-making.
3. Investing More Than They Can Afford to Lose
One of the most critical mistakes new investors make in the realm of cryptocurrency is biting off more than they can chew. Okay, this was metaphorical. The real meaning of the previous statement is that they overextend themselves financially.
Consider a scenario where you see the market taking a certain direction. You have done some analysis or the closer proximation of it and believe that you have a better grasp of what the next step will be and decide to invest your money in it. Whether by chance or luck, you have started to see some return on your investment.
Now, instead of being sensible and conscious of the fact that circumstances can change at any time, you decide to invest more and more money into it. So much so that you start borrowing funds from other people or selling your other assets to increase the capital that you intend to invest in crypto. But now, the scenario has changed for several reasons.
You started losing profits and have now started incurring losses. If you don’t react briskly, you might see losing all your funds to the market. Now, you have become a financial liability because not only have you lost your initial investment amount, but you have also lost further capital that you cannot pay back now.
The allure of high potential returns has claimed another victim, and there is nothing you can do about it now than regret it.
The volatility of the cryptocurrency market means that investments can experience rapid and substantial price fluctuations. Investing funds that are necessary for living expenses, debt repayment, or other critical financial obligations can lead to severe financial strain if the market turns against the investment.
To avoid this mistake, it’s crucial for new investors to only allocate disposable income – money they can afford to lose without impacting their financial stability. Setting a clear and manageable budget for crypto investments, separate from essential expenses, is critical to mitigate potential financial setbacks.
4. Ignoring Security Measures
In the high-reward but high-risk world of cryptocurrency, establishing good security measures for your crypto funds is of utmost importance. New investors often commit the mistake of neglecting the importance of securing their crypto investments properly, leaving them vulnerable to various attacks and potential theft.
The most common mistake among them is leaving your money on the crypto exchange, which is not a bad practice if the exchange has a good reputation and equally good security measures in place to secure your funds; we have seen cases in the past where different exchanges have been hacked and have seen users accounts being cleaned of their assets.
In some exceptional cases where an exchange crashes, like the FTX collapse, we have seen investors losing their funds, and there was nothing they could do to retrieve them.
It is, therefore, of paramount importance that you secure your funds by storing your private keys on hot or cold crypto wallets. A better approach would be to use hardware wallets for cold storage as they are mostly offline, which means they are mostly safe from online hacking attempts.
Secure practices also include setting strong, unique passwords for crypto exchange accounts and wallets, enabling two-factor authentication (2FA).
It is also vital for investors to safeguard their private keys and make adequate backup where possible because if you lose your private key, then you have essentially lost your access to your crypto funds, and it is highly improbable that you might recover them.
Understanding and implementing robust security measures is not just an option but a necessity in the world of cryptocurrencies. By prioritizing security, new investors can significantly reduce the risk of potential cyber threats and protect their investments in this rapidly evolving and sometimes volatile market.
5. Overtrading
Overtrading is a common trap that many new crypto investors fall into. The excitement and volatility of the market often lead individuals to engage in frequent buying and selling, thinking it will maximize their profits. However, this strategy can result in increased transaction fees, emotional burnout, and potential losses.
Frequent trading exposes investors to higher transaction costs, eating into potential profits. Moreover, the emotional toll of constantly monitoring and reacting to market movements can lead to decision fatigue and clouded judgment.
A more strategic and less frenetic approach involves long-term investment and a focus on quality assets rather than constantly chasing short-term gains. Patiently holding onto investments that align with a well-researched strategy can potentially yield better results over time.
Setting clear investment goals, sticking to a predetermined strategy, and avoiding impulsive trades are key steps to mitigate the risk of overtrading. Understanding that patience and a long-term view are valuable in the crypto market is crucial for new investors to avoid the pitfalls of overtrading.
6. Falling for Scams
Nothing pains us more than to admit that the cryptocurrency space is full of incidents where scammers have targeted people’s assets, especially those who are new to the space and have taken the brunt of their scamming activities.
Scammers try to exploit the amateur investors’ inability to handle such situations, and those who are a bit susceptible don’t realize what they are heading towards. Only after becoming a victim of their successful scamming attempts do they understand what is happening to them, but by that time, it becomes too late to react to it.
One of the worst scams a new investor can face is fraudulent initial coin offerings (ICOs), where a new crypto project is being introduced as the next big thing. New investors especially are attracted to it because they see it as a way to make quick and easy money. Only after the scammers run away with their money do they realize that it was a scam activity.
Other scam activities include fake crypto exchanges, Ponzi schemes, and, the most notorious of all, phishing attempts. Often, these scams promise high returns or exclusive investment opportunities. Still, in the background, scammers are rubbing their hands together in the hope of luring you into a false trap and taking away your funds.
To avoid falling victim to scams, new investors must practice caution and conduct thorough due diligence before investing. Researching the legitimacy of projects, verifying the credibility of exchanges, and critically evaluating promises of high returns are crucial steps.
Furthermore, verify all the information before participating in such activities that might sound too good to be true. Only by doing your due diligence you can protect your assets in the crypto world.
7. Following Hype and FOMO
FOMO (fear of missing out) is one of the most known factors that have caused investors to lose money on a particular crypto asset. It is one of the major factors that influence your decision on which crypto project you want to invest in next.
In cases where there is extreme hype towards a particular cryptocurrency created by social media, celebrities singing their praises for that asset, or sudden price surges seen by the market, investors think that they are viewing their way to success. What they don’t know is that what they are viewing from the front might not be the actual reality. What they are doing is just following the hype train and wishing for this project to change their fortune.
To avoid succumbing to hype and FOMO, new investors need to conduct independent research. They should base their decisions on the fundamental value and potential of the cryptocurrency rather than short-term market trends or social media buzz. Understanding the technology, real-world use cases, the development team, and the market demand for a particular cryptocurrency are crucial aspects to consider.
8. Ignoring Diversification
New crypto investors often overlook the importance of Diversification within their investment portfolio. Focusing solely on one or a few cryptocurrencies can significantly increase risk exposure, leaving investments vulnerable to the volatility of specific assets.
Suppose your investment portfolio consists of only a few crypto assets. In that case, you are at a greater risk of seeing a decline in the value of your portfolio in circumstances where those few assets lose momentum in the market.
Diversification is a strategy that involves spreading investments across different assets or asset classes. In the cryptocurrency space, it means not allocating all funds to just one or a few cryptocurrencies, thereby reducing the impact of adverse price movements in any single asset.
To achieve Diversification, new investors should consider investing in a range of cryptocurrencies with different use cases, development teams, and market potentials.
Diversification does mean including multiple potential cryptocurrencies in your portfolio but investing in traditional financial investment options like stock markets or bonds as well because if such a scenario arises where the whole of the crypto market is going through a bearish phase, then at least you have something on the outside that you can fall back to and get some breathing room in the tough crypto market phase.
9. Panic Selling During Downturns
One of the significant mistakes new investors often make in the cryptocurrency market is panic selling during periods of market downturns. The fear of sustaining further losses can lead to impulsive and emotional reactions, resulting in selling off assets at lower prices.
Cryptocurrency markets are known for their volatility, and downturns are a natural part of the market cycle. However, reacting emotionally to these downturns may lead investors to realize losses rather than holding onto their investments for potential market recovery.
To avoid this mistake, new investors should adopt a disciplined approach. Developing a long-term perspective and sticking to their investment strategy, even during market turbulence, is crucial. Additionally, setting stop-loss orders at predetermined levels can help limit potential losses while allowing investments the opportunity to rebound.
10. Disregarding Taxes and Regulations
Regulatory frameworks and tax guidelines surrounding cryptocurrencies vary widely across different regions and are continually evolving. New investors often overlook or disregard the legal and tax considerations, leading to potential legal consequences or unexpected tax liabilities.
Investors must familiarize themselves with the regulatory landscape in their respective regions. Understanding the legality of cryptocurrency investments, compliance requirements, and any restrictions imposed by regulatory bodies is vital for every investor.
Taxes on cryptocurrency transactions, including capital gains taxes, must be accounted for and reported as required by law. Failing to comply with tax regulations could result in penalties or legal issues. Keeping detailed records of transactions, including buys, sells, trades, and any income earned from cryptocurrencies, is essential for accurate tax reporting.
Seeking advice from tax professionals or legal experts well-versed in cryptocurrency regulations can provide clarity and ensure compliance with relevant laws and regulations.
Conclusion
The purpose of providing you with this information is to educate you about the potential mistakes you can make at the beginning of your crypto journey. Please be advised that the list doesn’t end here, and there are several other factors you would have to look at to completely widen your knowledge base regarding the dos and don’ts of the crypto market. You must not rely only on the information we have provided but conduct your research as well so you will comprehend what we are trying to say.
