Common mistakes crypto beginners make that should be avoid
Learning to invest in cryptocurrency is an ongoing process, as the market’s volatility and technology innovations are always unpredictable. While there are rules to follow, adapting to market changes is the best technique for gaining experience and achieving success.
Adequate education and research are always essential in learning everything about cryptocurrency and blockchain technology. This is because investing also involves using knowledge to forecast price changes to adjust asset allocation accordingly. For example, if a portfolio consists mostly of cryptocurrencies like Ethereum, a popular choice, it necessitates thorough research to make an ETH price prediction for the short- or long-term. However, researching isn’t sufficient ― as there’s more to familiarise oneself with in crypto. Thus, here are some common mistakes to avoid as a beginner.
Ignoring market volatility
Cryptocurrency markets have volatility indices similar to stocks and bonds. However, since they’re not regulated or owned by companies, the factors that make them unstable are more prominent. Supply and demand, technology developments, and regulation changes affect cryptocurrency prices. In addition, investors’ sentiments of fear and greed influence short-term market volatility.
Underestimating crypto volatility is a considerable error because predicting prices is already challenging. The market can take a sudden turn at any time if there are new regulations on crypto or if developers introduce new technologies in the industry. However, the opposite can happen, so negative news can bring the market down.
As a beginner, one can offset volatility effects by being prepared. Diversifying one’s portfolio with multiple reliable assets, staying up-to-date with the latest market news, and never buying more than can be afforded are recommended strategies.
Lacking the ability to identify scams
Frauds and scams are common in crypto, and failure to identify them can result in financial loss.
Unfortunately, there are many ways in which fraudsters trick their victims, including through:
- Investment schemes, in which scammers act as investment managers and request upfront fees from investors to participate in their strategy;
- Rug pulls scams, where scammers pump up new projects, mostly NFTs, and disappear when there’s enough funding;
- Social media giveaways include fraudulent posts where people are promised cryptocurrencies in exchange for a small payment;
- AI scams are new, but they’re using artificial intelligence to trick people through deepfakes or artificially inflating tokens;
Usually, it’s best to avoid anything that promises large gains or doubles investments. This is never possible, no matter how promising the offer sounds. Watching for contractual obligations, blackmail, or grammatical errors in such instances will enable the avoidance of scams.
Being influenced by FOMO
As a beginner investor, the fear of missing out (FOMO) is difficult to resist. This usually happens when people get anxious about missing out on an investment opportunity, so they act without thinking. Depending on the market, they buy or sell mindlessly, leading to overtrading or financial loss.
Control is a crucial achievement for crypto investors due to the dangers of poor decision-making. FOMO might affect individuals who spend excessive time on social media, where the overwhelming stream of posts can influence the perception of missing out.
Avoiding FOMO requires setting realistic expectations. Just because a majority sells their assets due to internet rumors does not ensure the project will proceed as anticipated. Therefore, it is advisable to always adhere to facts and avoid opinion-based considerations to develop an objective outlook.
Neglecting wallet security
As a crypto investor, a digital wallet is needed to manage funds and protect them from scammers or errors. Wallets can be digital, meaning access through an application, on the desktop, or hardware. Online wallets are susceptible to hacking, while hardware ones can be damaged or lost.
Wallet security is vital for ensuring the safety of cryptocurrencies and data. This means employing strategies like two-factor authentication for apps and good antivirus software. On the other hand, hardware wallets are more secure, but losing the seed phrase (the key to unlocking funds) may make it difficult to retrieve them again.
Always protect devices used for wallet transactions from ransomware and phishing, as these can also cause financial loss. This also implies the use of strong passwords and avoiding suspect links or visiting unsafe websites.
Investing in projects with little utility
Most cryptocurrency projects can become profitable with proper portfolio balancing and risk assessment. However, for beginners, starting with more stable and well-known cryptocurrencies on the market, based on market capitalisation – the total value of all the coins mined – is advisable.
- Large-cap cryptocurrencies are low-risk investments, with a market cap between $1300 billion and $390 billion;
- Mid-cap cryptocurrencies present untapped potential and a higher risk investment and include market caps between $1 billion and $10 billion;
- Small-cap cryptocurrencies are prone to massive volatility and have a market cap of less than $1 billion;
Always diversify the portfolio with mostly large-cap coins, such as Bitcoin or Ethereum, to provide stability. Consider adding mid-cap cryptocurrencies (Algorand, Polygon) and fewer small-cap coins, such as meme coins.
Overlooking legal regulations
While there’s a lack of thorough guidelines on cryptocurrency investing and trading, some countries have better-implemented taxes and regulations on cryptocurrency, necessitating awareness of these rules. It is essential to understand how the regulation works and to ensure the declaration of crypto profits accordingly.
To avoid legal penalties, it is advisable to maintain detailed records of crypto investments and ensure tax compliance, especially for beginners. Depending on the jurisdiction, laws can vary in their level of restriction, thus adherence to them is recommended.
Being aware of these investment mistakes
Making mistakes while investing in cryptocurrency is inevitable, but those that can significantly affect an asset portfolio can be avoided. For example, underestimating volatility should be avoided, as it can shift dramatically under the right circumstances. Identifying crypto scams is also crucial, as some are so well-crafted they could easily deceive investors. Finally, prioritising cybersecurity is essential to avoid becoming the victim of ransomware.
The editorial unit
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