Interested in investing in crypto, but don’t want to make any major mistakes with costly consequences?
With cryptocurrency all over the news recently, many new investors are jumping into the crypto market with hopes of earning high returns quickly. Whether you are dipping your toe in as a beginner or you are a seasoned investor, here are some common crypto mistakes people make and what you can do to avoid them too.
Sending Coins to the Wrong Address
When you mess up a money transfer with traditional banking, you can pick up the phone and call your bank. There is a decent chance the bank can reverse the transaction and get you your money back.
Cryptocurrency transactions are permanent. There are no customer service numbers to call. There is no undo button to push. Once you click “transfer”, your coins are gone from your account. There are no ways to reverse the transaction.
When transferring funds from one wallet to another, check and recheck the address. Then check again. Wallet addresses are a random assortment of numbers and letters. If even one character is wrong, you will lose your coins forever. Forever!
One thing you can do when transferring crypto is verify the first and last few characters of the address to be sure the address was copied correctly.
Besides making sure the address is correct, you also need to be sure you are sending it to the correct blockchain. Send Ethereum to an Ethereum wallet and Cardano to a Cardano wallet. Accidentally sending Cardano to an Ethereum address means in the best-case scenario, the transfer will be rejected by the exchange. In the worst-case scenario, those funds are gone forever.
A good piece of advice is to send a small amount initially to confirm the transfer went through correctly before sending your entire crypto wallet.
Leaving Your Crypto Fortune on the Exchanges
Cryptocurrency exchanges are constantly under attack by hackers trying to access their customers’ coins.
Early crypto investors know the story of Mt. Gox well. Mt. Gox was the largest Bitcoin exchange in 2014 when it was handling 70% of all Bitcoin transactions. Mt. Gox closed and filed for bankruptcy after discovering 650,000 Bitcoins were stolen.
Cryptocurrency exchanges try to prevent massive theft and security breaches by utilizing cold wallets to store coins offline. They will have insurance policies to cover the loss of cryptocurrency from hacking and theft.
Even though policies and protocols are in place at the exchange, you can still lose your crypto if your passwords get stolen and your two-factor authentication is compromised. There are also situations outside your control, such as the exchange getting banned in your country.
The whole point of cryptocurrency is decentralized finance. No state or government controls cryptocurrency. You fully control your crypto. But when you leave your crypto on the exchange, you are giving custody of your crypto to the exchange. When your crypto is accessible on the internet, anything can happen to it.
Low-Priced Coins Does Not Mean Better Value
When you go to a site such as CoinMarketCap and look at the list of the top 20 coins, you will see everything from Shiba Inu at less than ten-thousandth of a cent to Bitcoin at over $50,000.
Does that mean Shiba Inu is a bigger bargain than Bitcoin because it costs less? The inexperienced people will think if I buy a billion SHIB, hold it until it goes to the moon and hits $1, I’ll be a billionaire. While Shiba Inu could possibly hit $1 one day, that is more than likely wishful thinking.
The price of a coin is calculated by taking the coin’s current market cap divided by the circulating supply. Bitcoin has a $1 trillion market cap and there are 18.8 million Bitcoins in circulation with a total supply of 21 million Bitcoins.
Compare that to Shiba Inu, which has a market cap of $26.8 billion with 549 trillion SHIBs available. If Shiba Inu hits $1, the total market cap of the coin will be $549 trillion. That is more than all the money in the world.
To put it in another perspective, the current global crypto market cap is $2.58 trillion.
Investing in Too Many Coins
There were 14,955 different crypto tokens listed on CoinMarketCap when I started writing this post. A week later, there are 15,501.
Anyone can create a new coin. There are new ones created every few minutes. Many of these coins and projects will likely go nowhere or will eventually disappear.
When investing, diversification keeps you from being completely wiped out if a stock or coin crashes.
But similar to drinking too many energy drinks, over-diversification in cryptocurrencies can be harmful to your bottom line. When you invest in too many different coins, you will have a hard time keeping track of the news and understanding what is happening in the individual crypto projects.
Like stocks, crypto has bull runs and bear markets. Not all coins go up and down at the same time. When you are following too many coins, you will miss profit-taking opportunities.
If you want to get exposure to a variety of cryptocurrencies that you plan to buy and hold, make sure it is with the blue-chip cryptos. These are the established and trusted cryptocurrencies that have been around for a long time with large market capitalizations.
Going All-In On A Coin
The opposite of investing in too many coins is putting all your money into a single coin. Investing in cryptocurrency is inherently risky. Putting all your money into one coin means you are entirely at the mercy of that coin.
When you have other investments such as stocks, index funds, or real estate, it is ok if you decide to dedicate a small percentage of your overall portfolio into only Bitcoin or Ethereum for some exposure to cryptocurrency.
The problem is when someone puts their entire life savings into an altcoin that no one has heard of without a track record. The crypto could fail. Its price could drop precipitously. Or the coin could be a total scam, similar to what happened with the Squid Game coin where the founders cashed out and deleted the coin’s white paper and website on their way out.
Diversification helps you avoid financial ruin. A better approach to investing in crypto is to put maybe 70% of your cryptocurrency portfolio into established coins. With the remaining 30%, you can put it into riskier coins that you think have potential.
Buying or Selling Based on Price Predictions
No one can predict what a cryptocurrency’s price will be in the future. You should not base your investing on articles you read and videos you see online.
No matter how good the person making a price prediction for a coin is, they will never be 100% accurate. No one will ever be able to predict a coin’s price at the very top or bottom.
When you search Google for “bitcoin price predictions”, you will see analysts claiming Bitcoin could hit $100,000 in early 2022 or $400,000 in a few years. There is no such thing as a sure thing in investing. Otherwise, we would all be rich. These articles are clickbait, and the only person making money is the website owner who is selling advertising on the site.
To be a successful crypto investor, you need an exit strategy that is tailored to you. Without an exit strategy, you will continue to hold a coin as the prices increase in hopes of it going even higher. Then when a coin’s price drops severely, you will continue to hold in hopes of it going back up eventually and reducing your losses.
Following the Herd
Crypto is prone to large moves up and down. When you read in the news about a coin’s price making a big move up, resist the temptation to make the mistake of jumping in with a big purchase of your own.
FOMO or fear of missing out causes people to trade based on emotion. You may get lucky and the coin continues to move up once you bought in. You also risk getting in late and buying at the peak. After every big move up, the price will usually retrace as people sell and take profits.
All the people who made big money investing got in early on. Once a project is all over the news and becomes a trending topic, you are already too late. You do not want to be the person who bought Dogecoin at almost 70 cents after seeing Elon Musk joke about it on Saturday Night Live.
Should you decide to invest in a coin that has shot up, one strategy you can use is dollar-cost averaging. Rather than investing all at once, buy smaller amounts over some time. You might not have bought the coin at the lowest price should the coin keep on going up, but you also might avoid buying at the peak too if it reverses soon after your purchase.
Trading Cryptocurrency with Leverage
Leverage or margin trading is borrowing money from the broker or exchange to increase your buying power. This allows you to open larger positions than you would normally be able to with the available funds in your account.
Leverage will usually be described as a ratio or a multiplier, such as 5:1 or 5x. This means if you had $10,000 in your crypto trading account, you would be able to borrow up to $40,000 to buy $50,000 worth of crypto.
When you use leverage, you are taking on increased risk in your trading. When the market is moving in your favor, you will see higher profits. But if the market moves in the opposite direction, your losses will be bigger too.
The lender is willing to let you borrow money to trade, but not for you to lose it. Should a coin’s price fall drastically and your balance goes below the maintenance margin requirement, the exchange will start liquidating the coins you are holding to get its money back. This is known as a “margin call”.
The borrowed capital to trade on leverage is not free either. You will pay a small amount of interest on the money you borrow.
The volatility of crypto and the crypto markets being open 24/7 mean you could go to bed at night and wake up to an enormous amount of losses if you are an inexperienced trader.
Buying and Selling Too Often
In the United States, when you sell cryptocurrency that you have held for at least a year, you will pay long-term capital gains tax on the profits. The long-term capital gains tax rate depends on your income and the gains are taxed at 0%, 15%, and 20%.
Short-term capital gains on cryptocurrency are taxed as ordinary income. Depending on your tax bracket, you will be pay taxes between 10% and 37%.
Someone with $100,000 a year in taxable income will pay 15% on long-term capital gains compared to 24% on short-term capital gains.
Besides increasing your tax obligations, frequent buying and selling will increase the amount you pay in trading fees. More and more stock brokerages are offering free stock trades. Yet crypto exchanges are still charging fees based on a percentage of the amount purchased and sold since it’s a nascent space.
To avoid paying too much in taxes and trading fees, you should stick to a trading plan and choose an exchange that charges lower commission fees.
Today, cryptocurrency exchanges charge anywhere from 0.1% to as much as 4% in commission to buy and sell crypto.
Not Having Proper Security Precautions
Finally, one of the biggest crypto mistakes you can make as an investor is not being security conscious.
Due to the anonymous nature of crypto, once your coins are stolen, they are likely gone forever. The chances of you recovering or finding the person who stole your coins are close to zero. To avoid losing your crypto, you need to take proper precautions.
Beware of scammers posing as popular influencers or public figures on social media platforms. Even the Twitter accounts of Bill Gates, Elon Musk, and Apple have been hacked and used to trick people into sending Bitcoin with promises of getting a larger amount back.
Watch out for private messages and comments posted online about how someone was able to make lots of money investing in crypto and to message them on Telegram, Snapchat, or Whatsapp for details on how you can do it too.
Never give anyone your private keys, passwords, or seed phrases. Do not save them online, in the cloud, on your phone, or on your computer. Write them down on paper and keep them safe somewhere. To be extra safe, make a second copy and keep them somewhere secure at a different location in case your house catches on fire.
Use two-factor authentication (2FA) to protect your crypto accounts from unauthorized access in case someone gets your login. SMS-based 2FA is better than nothing. An authenticator app such as Authy or Google Authenticator (Android or iOS) is even better. For even more security, use a hardware key such as a YubiKey from Yubico. If you use a hardware key, the best practice is to get two – one as primary and one as a backup should the primary gets lost or damaged.
Cryptocurrency has only been around a short time in the whole scheme of things. A lot of money have been made and lost in crypto in that short period. Many people are attracted to crypto because of the potential for growth as decentralized finance matures.
Putting money into digital currency brings with it a whole different set of risks that you did not need to worry about with fiat currency.
If you are thinking about getting into crypto and buying your first Bitcoin or Dogecoin, avoiding the common crypto mistakes mentioned in this post will help make investing in cryptocurrency much smoother.
What are some other mistakes that should be avoided when owning or trading cryptocurrency?