Investing in cryptocurrencies has proven to be a lucrative venture. Cryptocurrencies can be volatile, and their value has gone both up and down over the years, but in general, the markets are stable. That isn’t to say that any investment in crypto is going to generate profit.
In this article, we’ll go over some of the most common mistakes that crypto investors make and how to spot and avoid them. Keep in mind that there are no sure things and that every investment carries a certain risk.
Table of Contents
Not Knowing The Basics
Everyone is eager to trade and to make money out of this innovative technology and its many applications. However, there’s no way to do so without studying it carefully and understanding what you’ve purchased. This means that you need to know about what makes the cryptocurrency you’re buying unique.
For the most part, it’s a technical issue going into the blockchain technology and the scalability of users. That’s not something most investors are familiar with, but in essence, it’s the tech they are buying when purchasing crypto.
Not Taking Action
With every trading opportunity, there’s an urge to stick to the status quo and not take action. Some of the best investments work in this way – you buy, and you hold, and the investment itself brings in the revenue. That’s why it’s important to act when you notice a spike in the market.
Many inexperienced investors are hesitant to try and end up missing out on many great purchases. As is the case with most decisions regarding finance, it’s about striking a balance between making a quick sale and holding the cryptocurrency that keeps increasing in value.
Going All In
It’s a mistake to go all in on cryptocurrency trading. It’s not always easy to figure out how much to invest in crypto in 2023 to make it worth your while. The goal is to hedge your bets and spread your investments between different options. At least a portion of the investments should go to traditional investing options such as bonds, stocks, and futures.
Common wisdom says that about 5 percent of your portfolio should be in cryptocurrencies. That way, the volatility won’t affect the rest of the portfolio, even if it goes bad. It’s also a good idea not to focus on one cryptocurrency only.
Ignoring the Fees
Cryptocurrency exchanges charge a variety of different fees. They are paid when depositing the funds to the exchange. The percentage depends on which payment method you’re using. The fees are the largest when the payments are made with cards and the smallest when they are made with bank accounts. The platforms also differ greatly from one another.
There are also commissions that are paid when the users purchase a cryptocurrency. The amount differs greatly between exchanges. These tend to bite into your profits, and it’s important to be mindful of them. The investors should start by studying the terms offered by the exchange before using it.
Not Understanding the Tax Implications
The decentralized and almost informal nature of cryptocurrencies is what has drawn so many users towards them. However, times have changed, and crypto is now just one of many investment options. It’s accepted widely by many different institutions, governments, and corporations as an investment and as a payment method.
All of this also means that the winnings made from crypto are now taxable, just as any other profit would have been. This is something too many investors overlook and ignore. It’s a mistake to do since the taxes cut into your profits.
Treating Crypto as Shares
Many investors treat trading in cryptocurrencies as trading in shares. This is understandable since the exchanges are similar, and shares are the most common investment. However, the two are not the same. When buying shares, an investor buys ownership in the company. This isn’t the case when buying cryptocurrency, as you don’t become an owner of the company behind it.
If buying crypto and trading in it can be compared to any traditional transaction, it’s most similar to buying foreign currency. The value of crypto is just as volatile, and it’s a means of transaction and not an asset in itself.
Chasing Cheap Coins
There are countless new and cheap crypto coins created every day. Almost every one of them is advertised as the next big thing. The one currency that will become the new Bitcoin and that will replace the traditional financial structures.
It’s best not to chase these since chances are that they will be what’s promised are microscopic. These small and cheap coins will take a big portion of your time, and over the years, they will also take a piece of the money as well.
Putting All Your Eggs in One Basket
At this point, dozens of cryptocurrencies are popular on the market and are widely accepted as payment methods by different institutions. That’s why investors should diversify their portfolios and trade with as many of these as possible. The same principle applies to almost any other trade or investment.
The best way to go is to have a few of the biggest cryptocurrencies out there, such as Bitcoin, Ethereum, or Solana, and a few of the other ones known for their unique tech uses. Some also like to add a few stablecoins in their portfolio, as it makes it less volatile.
Not Having a Plan
Investing in crypto isn’t betting, and it shouldn’t be done on a whim and without a plan. Instead, a smart investor creates a strategy that will take into account their budget, their long-term plans, and the qualities of the cryptocurrencies themselves.
The key, however, is to stick to this plan no matter what. Being consistent with your investment strategy is the best way to make the most out of it and come up with a profit. That means that regardless of how tempting some investments may be, you should stay away from them if they are not a part of your strategy.
Not Cutting Your Losses
Some trades aren’t going to work out. This happens regardless of what you do and how you approach the market. That’s something a trader needs to accept and adapt to. This means you should cut your losses once you’re sure they are actually losses.
It may be a difficult decision to make since the sunk cost fallacy can be a real burden. The important thing is not to be sentimental and to plan for some losses, as they are a part of the process.
To Sum Up
Investing in crypto can be a great way to make a profit. Cryptocurrencies have proven to be volatile, but they are on a steady rise in the long run. There are a few basic rules that every crypto trader should follow as they can help you make the most out of the process.
These are mostly similar to rules for investing in any other asset. This means that you should diligently investigate the market and create hedges that will prevent you from spending all of your money on a single trade or a single currency.
Joel is a whiz with computers. When he was just a youngster, he hacked into the school's computer system and changed all of the grades. He got away with it too - until he was caught by the vice-principal! Joel loves being involved in charities. He volunteers his time at the local soup kitchen and helps out at animal shelters whenever he can. He's a kind-hearted soul who just wants to make the world a better place.