Avoiding Common Mistakes Beginner Crypto Investors Make
The crypto space can be tricky and unforgiving when it comes to your overall investment approach and the decisions you make - regardless of whether you are just starting your crypto journey, or are an investor with years of experience behind you.
Particularly given the growth that crypto has seen in recent years, many investors are falling into common crypto traps that come as a result of their lack of experience and assumptions that crypto investment strategies are the same as traditional strategies.
As a result, knowing how to avoid the common mistakes beginner crypto investors make is crucial in seeing returns and success.
Having a Lack of Understanding Surrounding the Cryptocurrency You are Investing In
One of the most common mistakes that crypto investors will make is not having a strong understanding of the particular cryptocurrency they are investing in. Whilst you might have a good understanding of crypto and blockchain in general, the varied nature of altcoins means that their performance can depend greatly on a range of varying external factors.
This means that when you are investing in more niche altcoins, in particular, a strong understanding of that particular cryptocurrency, how it differentiates itself from the alternatives, the factors that will influence its use, and the overall attitudes towards it is crucial in making an investment decision with confidence.
As a result, please do your research when it comes to the cryptocurrency you have chosen to invest in. Even if it is something as well known and popular as Bitcoin, having a good understanding of the details is crucial - Zipmex provides a great example of how in-depth knowledge can improve your judgement and decision-making skills in a crypto context.
Assuming that Crypto Investing is the Same as Investing in Traditional Shares
Whilst many new investors will assume that crypto behaves similarly to other more traditional investments, this is not true. Stocks, for example, provide investors with ownership in a company and pay out dividends - the same cannot be said for crypto.
What this means is that if a company issues a cryptocurrency, their company performance may not be correlated with the performance of the cryptocurrency. The crypto performance will be much more speculative and relative to market perceptions of the coin, potential uses that it has, and where investors see the market going. This is one of the reasons as to why crypto investors trade crypto like bitcoin on a more short term, high-risk basis, whereas traditional investments are often made on a more long term basis.
Overtrading and Getting Carried Away
Yes, investing in cryptocurrency is very different from investing in traditional stocks, and many crypto investors indeed make buying and selling decisions on a more short term basis. However, a problem in this regard is that some crypto investors will make the mistake of getting carried away and overtrading.
Whether this overtrading comes from excitement or attempting to trade further to recoup losses, this can be a problem for many reasons. Firstly, it is a sign of a more risky approach in general, as investors who overtrade are usually doing insufficient research before making decisions - this can be even more problematic when considering the overall risk associated with cryptocurrency in the first place. A second issue with this approach is that you will pay fees with every trade you make, reducing the return you make and in many cases ending up in a loss where you would otherwise be making a profit.
Ultimately, overtrading will encourage further poor decision making, and realistically, there are usually a limited number of good trades to make within a given period of time. Instead of trading too much, use the time to instead learn about the currencies you are investing in, and make more educated decisions as a result.
Having a Poor Understanding of How to Read Crypto Charts
Regardless of how correct your logic and reasoning is surrounding crypto trading, if you are basing these decisions on incorrect readings of crypto charts, they aren’t going to provide you with the benefit that you are expecting.
Many beginner investors look at the past performance of cryptocurrencies as a measure of future performance - unfortunately, this isn’t a good measure of what to expect. With this being said, reading crypto charts and performing technical analysis of historical data still can allow helping better predict future performance - for example, understanding the signs before the market is about to turn, or if there is a discrepancy in the pricing of an asset in comparison to what it is truly worth.
There are various aspects of technical analysis to get yourself acquainted with as a beginner - understanding phases of market trends, market movements, the chart time frames to pay attention to, and candlestick chart patterns will ensure that you minimise the guesswork and are comfortable in making investment decisions.
Having a Lack of Understanding of Common Crypto Terminology
As a beginner, trading crypto can seem confusing with so many crypto-specific terms and abbreviations there to throw you off. Whilst some people getting into crypto trading will brush over these or ignore them, this is a sure way to misread and misinterpret information.
Here are some common crypto terms and their definitions:
- Altcoin: Refers to any cryptocurrency that came after the original cryptocurrency, Bitcoin.
- Blockchain: Refers to a system of several computers, linked in a peer-to-peer network that allows transactions to be made in cryptocurrency.
- FUD: Fear, uncertainty and doubt, used to describe people who are spreading unnecessary negativity surrounding crypto.
- Hashing: The process by which a bitcoin is mined
- HODL: Abbreviation for ‘Hold On for Dear Life’, describing an attitude of investors where they believe a seemingly volatile investment will eventually become profitable.
- ICO: Initial coin offering, where cash is raised for a new cryptocurrency.
- Node: Any computer connected to a blockchain network.
- Satoshi: Also called ‘sat’, it is the smallest fraction of a bitcoin,
These are just a select few of the vast terms and abbreviations out there in the crypto world - understanding them is crucial in knowing what is going on within the market and understanding the views and decisions of other investors.
Using the Wrong Trading Platforms and Crypto Wallets
This is a unique aspect of cryptocurrency investing - on top of the number of trading platforms to choose from, crypto wallets are also important.
Firstly, you need to ensure that you make the right choice in terms of crypto exchange or trading platform. Depending on the amounts you are spending, the types of cryptocurrency you want to trade, and the specific features you are looking for, you’ll need to decide on the right platform for you. Please take into consideration things like fees (and whether they are per trade or percentage-based), whether a mobile app is important to you, and whether they have a good reputation.
A consideration that is often forgotten by beginners is that you should not keep your cryptocurrencies on exchanges, which can be a significant target for hackers. Instead, invest in a hardware wallet - as they are disconnected from the internet, hackers will require access to the physical wallet as well as knowledge of the passcode.
Blindly Following Market Trends and Crypto News
A common mistake that new investors will make is they will assume that in following market trends and news surrounding crypto, they are making good investments without doing the work themselves. Unfortunately, the crypto world is not so straightforward, and the news is often sensationalised or exaggerated to influence the market.
For example, news sites can release extremely negative crypto news, with deceiving headlines and overly pessimistic outlooks, to generate traffic and discussion, increasing fear and doubt surrounding a particular cryptocurrency, and influencing market trends. Many investors who have put their money in a particular cryptocurrency make media releases that encourage the confidence of other investors in that cryptocurrency, in an attempt to change the overall attitude towards it and ultimately push up the price.
In following market trends blindly, there is also a lot of room for error - for example, in falling for ICOs, the price will often rise significantly to start, but this rise will not last long - beginner investors are often left with coins of little value.
Making Impulsive or Emotional Decisions
Often, given the limited experience that beginners have when trading crypto, certain market trends, performance indicators and unfounded rumours can cause them to quickly sell their cryptocurrency in a panic.
Alternatively, more experienced investors will have a strong understanding of how the cryptocurrency market works - this will mean that they can make calmer and level headed decisions. Ultimately, unless there is a genuine reason to sell, experienced investors will expect and understand sudden drops in pricing, or poor performance over the short term.
While beginners often panic and sell at the first sign of trouble, they can also often be sucked into a fallacy that comes as a result of having significant amounts of money invested in a cryptocurrency, where they feel the need to continue to commit to a bad investment. Knowing when to cut your losses and avoid further trouble is crucial, and doing so means putting emotions aside when making investment decisions.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Last updated: 10/11/2020