Despite heavy opposition by some experts and governments, cryptocurrencies are here to stay. According to CoinMarketCap, there are presently 17,185 coins and 458 exchanges. Additionally, the entire market is worth roughly $1.6 trillion.
Over the last few years, millions of people have become seriously interested in investing in this highly volatile financial security. Meteoric price rises in the region of thousands in percentage have been commonplace with crypto in recent history.
Of course, everyone wants a piece of this massive pie with such impressive figures. However, as with any investment, it all starts with having a well-thought-out and realistic plan.
Moreover, although success stories of low-capped coins suddenly increasing massively in value occur, you should never invest more than you can afford to lose. However, it doesn’t stop here.
In this article, you’ll learn the top 6 mistakes to avoid when investing in cryptocurrencies.
1. Not DYOR (doing your own research)
Cryptocurrencies are an avenue rampant with shills and charlatans who prey on the ignorance of uninformed investors. The internet is a fast-paced environment where misinformation commonly spreads throughout.
Therefore, one of the simplest mistakes to avoid is never relying solely on the advice of others when making an investment decision. You should always do your own research and do it thoroughly.
It helps to have some background in financial instruments, blockchain technology, or cryptography. Otherwise, you should be well-versed about the ins and outs of this market before investing.
2. Assuming price equals value
Just because one coin is worth a few dollars while another is priced in the thousands doesn’t make the former substantially less valuable. The concept to understand here is market capitalization, derived from multiplying the number of coins in circulation with the price.
For instance, while Bitcoin’s price (presently $37,129) is roughly 35,700 times higher than Cardano’s (currently $1.04), it doesn’t mean the coin is worth this much more. In reality, it’s about 20 times (Bitcoin’s $707 billion market cap divided by Cardano’s $35 billion).
Overall, price doesn’t determine value; market cap does. It’s the size of the pie that’s more significant rather than the price of each one. Therefore, this is the metric worth observing when investing.
3. Investing mostly in shitcoins
Although there are well over 17,000 coins, a large percentage of these are unlikely to increase significantly in value in the next decade. Although anomalies such as meme coins have skyrocketed in price, these are exceptions.
One of the factors to look for when investing in a coin is potential longevity. Therefore, most projects past the #200 spot on CoinMarketCap probably aren’t good bets.
This isn’t to say you shouldn’t invest in meme coins or a highly obscure and low-capped digital currency. However, it’s probably best to allocate a small portion of your entire disposable investment instead of a massive portion.
4. Frequent buying and selling
Most cryptocurrencies are bought and sold through exchanges, and as financial services providers, trading costs are involved. Some exchanges are known for having higher fees than others.
Therefore, a straightforward tip is to ensure you’re using the cheapest in this regard. You should generally understand that a fee is involved every time you swap between digital currencies (whether buying or selling).
The second cost to consider is the network fees, which can be notoriously high with the likes of Ethereum. Lastly, the other element, depending on your country, is taxes.
Therefore, if you sold your investment at a profit, you need to see what you’d be left with after trading, network fees, and taxes (if applicable). This is why it’s generally recommended to reduce your trading costs by ‘HODLing’ or to hold for the long term.
5. FOMO (fear of missing out)
The prices of cryptocurrencies tend to be driven by emotion-fueled speculation. One classic FOMO trap is buying a coin near or at its all-time high. Uninformed investors can regularly commit this mistake in the belief that it feels safer to invest at this point.
However, if you understand how markets move, you should realize that nothing moves in one continuous direction without any significant pullback.
Therefore, it’s usually best never to buy a coin when it’s too ‘expensive’ since the risk-to-reward parameters become unfavorable. A similar FOMO mistake is never selling your holdings at a profitable point.
It’s worth mentioning, though, that if you planned to hold for the long term, then this might not be a problem. However, it’s still probably better to take some profit off the table because the price is unlikely to travel in an extended direction without a retracement first.
6. Not understanding how to use exchanges safely
This aspect encompasses several factors. The first one is choosing the most reputable exchange. As with any financial market, scam exchanges do exist. Moreover, it does take some homework to find the legit ones as most are not legally required to be regulated.
However, your best bet is looking for regulated ones or those with the most favorable reputation. Once you’ve established the best exchange with a verifiable location that also keeps most of its client holdings in offline storage, here are a few other crucial safety tips:
If using centralized exchanges, always enable two-factor authentication.
For long-term storage, you should consider purchasing a ‘cold’ or offline USB-based wallet to reduce the risks of online hacking.
Whenever you send funds for the first time to an address, always send the smallest amount possible in the likely case you didn’t input the correct address.
It’s better to use something like a QR code, ensuring you don’t get the address wrong since transactions in crypto are virtually irreversible.
Crypto is like the Wild West to many seasoned investors of other securities. Although there are so many exciting things with blockchain technology, decentralized finance, NFTs (non-fungible tokens), and the metaverse, this is one financial market where you need to be knowledgeable.
You should also approach everything with a bit of skepticism, considering that cryptocurrencies are relatively new compared to more established markets such as stocks and currencies that have been around for several decades.