Crypto investing has, over the years, increased at an exponential rate, attracting more and more investors. However, the overflow of information and constantly changing markets can easily lead to mistakes, especially if you are a beginner.
This article has gathered the most common mistakes one can make when investing in crypto, along with how to avoid them.
Lack of Proper Market Research
As in the case of any other investments, proper research of both the asset and the overall market condition is highly essential. When it comes to crypto, the lack of knowledge of the ins and outs of the coin is magnified multifold, because more than just understanding the asset, how you will invest in it is also crucial. Many people invest in crypto just because it is trending, or due to FOMO, without conducting analysis, which results in emotional reactions to short-term movements, resulting in losses.
Doing your own research, reading white papers, visiting the official website of the coin, etc., are all necessary before entering the market. Create an investment strategy before getting started with the investments, with clearly defined goals, risk tolerance, and the range of your investments.
Ignoring the Volatility of the Market
While experienced investors expect a certain level of volatility in the market for a certain period of time, newbies tend to ignore this part completely. This stems from the lack of proper knowledge about the market. Due to the highly volatile nature of crypto markets, even 10%, 20%, or 30% swings can be seen within a very short period of time.
The investors must be prepared for the constant fluctuations in the market, and those looking for safer investments are recommended to invest in less volatile assets. You are advised not to panic sell your assets prematurely, only to lock in losses. If the market is not favorable, you can HODL your assets and wait for market conditions to improve before selling the assets.
Falling for Scams
Even the experts can sometimes fall for scams without realising. The unregulated, complex nature of cryptocurrencies attracts a lot of scammers, creating new types of scams every day. Proper knowledge, along with proactive measures, can, to an extent, keep you safe from scams. Some of the most common scams in the crypto world include crypto romance scams, Ponzi scams, pump-and-dump schemes, rug pulls, phishing attacks, etc.
It is your responsibility not to be fooled by the scammers, which can end up costing you your savings. If something feels too good to be true, trust your instincts, because it probably is. Maintaining a healthy level of skepticism and performing due diligence before engaging with any crypto platforms or services can save you from falling victim to scams and fraud.
Lack of Diversification & Over Diversification
Beginners often consider an all-in strategy, with all their investment going into a single project. Just as a crypto can rise quickly, it can also collapse quickly, and the market has already witnessed many promising projects falling into the abyss.
Also, while diversification is key, some investors tend to over-diversify their investment portfolio, which can result in enormous consequences. Over-diversification indicates that the investors are holding many underperforming assets, resulting in heavy losses.
Investors should make sure to diversify the portfolio by investing in fundamental cryptocurrencies, which have a clear fundamental value. Understand how each asset performs in the market before investing in it. You can diversify the portfolio by investing in large, established projects like Bitcoin and Ethereum, along with smaller, promising coins and tokens.
Emotional Investments & Panic Selling
Strong movements in the market can evoke emotional decisions, based on fear, greed, despair, and ecstasy. These emotions can lead investors to either panic-sell, due to the fear of ending up with huge losses, or impulsive buying, in the hope of making more profit. In most cases, emotion-driven decisions do not lead to profitable outcomes.
Instead of taking emotion-driven investment decisions, stick to your predefined strategy. Invest only what you can afford to lose. Follow the market analytically, while keeping in mind that cyclical booms and busts are natural and will alternate.
Blindly Following the Rumors and Social Media Trends
The world of crypto offers numerous “sure tips” and promises to make quick profits from social media influencers and crypto experts. Several pump-and-dump groups have risen, aiming to manipulate the market, and beginners often fall into these traps, buying assets solely based on what’s trending on social media.
The truth is that social media is crowded with creators who claim to be crypto gurus, while lacking actual expertise, and take no responsibility for what they are professing. Hence, always approach the tips on social media with caution and skepticism, verify the sources, analyze the data, and make sure you are investing in projects that have actual value.
Lack of Long-Term Plan and Strategy
Not having clear goals can make the investment erratic and impulsive. This is another common mistake made by new investors, leading to their failure in the market. Many buy and sell crypto based on the momentary value, resulting in inconsistent performance and poor returns with meager profits.
Have a clear-cut strategy, with a proper definition of why you are investing in the project. Is your goal making a profit, achieving financial freedom, saving for retirement, or simply exploring the new domains of technology? Set realistic, achievable milestones with regular review of your portfolio. Having a proper plan saves you from making impulsive decisions and withstanding the market fluctuations.
Ignoring the Security Measures
While the advancements in technology adopted by the trading platforms might have simplified the investment process, holding crypto is more than just buying or selling. Implementing proper security measures is crucial to keep your digital assets safe and secure, while having total control over them.
The best way to manage the risks is to have custody of your wallet. And among the storage mechanisms, a hardware wallet is the best choice. In case you are opting for a centralized exchange to handle your assets, make sure to use extra security measures such as two-factor authentication.
Overtrading
Many crypto noobs believe that making frequent buying and selling will yield them higher returns. However, what they fail to realize is that every transaction incurs fees, adding up to a significant amount over time. These fees, along with the tax liabilities, can flip the narrative, diminishing the profit.
People tend to overtrade due to a lack of proper planning and strategizing. Always have a well-defined plan, including a long-term profit strategy, before making investment decisions. Setting clear entry and exit points, along with the maximum number of trades per day or week, can mitigate the problem. Also, make sure to focus on quality over quantity, focusing on projects that align with your trading strategy, with high-profit probability.
Forgetting to File Returns
Many new investors are unaware of the fact that crypto is subject to capital gains tax in the majority of countries where it is legal. Every income or gain made from selling cryptocurrencies is taxed as capital income, and every activity involving crypto, such as sales, trades, and purchases, is a taxable event.
Keeping a record of all the transactions is the best possible way to avoid forgetting to file a return or scrambling through your financial reports during the deadline. If you have multiple exchanges to manage your portfolio, consider using tax-reporting tools to generate accurate reports. In addition, familiarizing yourself with the country’s income tax laws and guidelines will give you a better understanding of how different transactions affect your taxes.
Conclusion
Crypto investments offer significant opportunities to gain wealth, but require proper knowledge, through research, and long-term planning before jumping into making investments. It is completely your responsibility to not fall for scams and traps while avoiding losses.
Emotional trading, forgetting your tax obligations, and careless trading can also increase the risks of losses. With proper understanding of the technology, realistic risk management strategies, and a long-term profit plan are the key to success in the fast-paced crypto markets.
