Seventeen crypto investor mistakes

Consider the most common mistakes when investing in cryptocurrency.

The most common mistakes of crypto investors

1. Trying to make money on “insiders”

 When a project is advertised in the public space, it usually happens already at its final stage of implementation, and all the information, in this case, is already included in its price. Therefore, it should understand that the information that reaches the average crypto trader is not insider information. Since he is at the end of the chain of investors who received this information earlier, probably, they have already used it for their purposes.

Such a chain, as a rule, includes Developers and insiders of the project – funds financing the project – large and retail investors – media promoting the project.

Therefore, you should not take on faith any information about a project that appears on social networks, which interested parties pass off as insider information. It is always necessary to analyze the sources of such information. 

2. Don’t consider the price of entry into the project of significant funds

Prices for entering a venture capital project in the early stages are 10-100 times cheaper than those that, as a rule, a retail investor already enters. Therefore, it is always necessary to look at the prices at which significant funds entered the project and the period for unlocking their investments. Since, in the event of their exit from the project and the sale of their coins, their price will inevitably collapse due to this volume.

It can always obtain this information on DropsTab by selecting the coin of interest in the Fundraising section.

At the same time, the above in no way means that it is necessary to avoid projects that significant funds have entered. On the contrary, as a rule, funds help a project with early financing, as by spreading information about it, they contribute to a substantial increase in its value in the future.

For example, at the initial stage, the funds bought the SOL coin at $0.25, and now the price has exceeded $130.

And although there are no specific criteria for analyzing funds, you can carry out analysis based on accumulated experience and, to some extent, your intuition.   

3. Chase windfall profits

Of course, a yield of 25,000% looks more than tempting. But we must not forget that high returns are always associated with increased risks. Practically, all grandiose returns ended in no less “soul-wrenching” falls. So please don’t risk it.  

Often staking returns stablecoins in 19.5% is more profitable than trying to catch high-yield projects.

4. Invest in shell projects

Some projects are fraudulent or are financial pyramids. Therefore, it is always necessary to study what value this project carries. It is essential to check the history of the project and prices to understand at what stage the investor is, whether the current assessment of the project corresponds to the proposed product and whether this project has an effect.

Whenever an investor decides to enter a project, it is better to do it at an early stage.  

5. Don’t take profits

It can be seen as a continuation of the previous error. Therefore, it is imperative to lock in profits. To exclude the emotional component when making decisions, you must always have a pre-thought-out plan for fixing it. Such a plan will help you exclude emotions, carefully observe the situation and make appropriate decisions.

There is a life-tested definition that money in the market is market money. But the investor’s money is what he withdrew from the market and spent.  

6. Not to notice new trends

There have been a lot of trend changes in the cryptocurrency markets lately:

• Axie → STEPN;
• DOGE → Shiba Inu;
• ETH → Solana/Luna/Avalanche;
• Cryptopunks → Bored Ape Yacht Club.

 Ultimately, those who invest in new trends and directions in time win in this market. 

7. Don’t follow microtrends

Microtrends change pretty frequently in the crypto market. Therefore, you should not direct your attention to only one coin or niche. The market is changing, and recognizing small changes in time that can lead to the emergence of new directions is a significant advantage.

8. Do not take into account “slips”

When exchanging cryptocurrencies on decentralized exchanges (DEX), investors often overpay up to 20% of the cost due to slippage of their order. As a rule, slippage is observed in markets with low liquidity, in very volatile coins, and with small trading volumes.

On the DEX, it is possible to set the amount of possible price slippage manually. For example, on Pancake, the default slippage is 0.5% – the investor, having paid $100 for the token, will receive it for $99.5.

9. Don’t take into account “non-permanent” losses

Intermittent losses occur when an investor farms two tokens in a liquidity pair – LP), for example, in BNB-CAKE.

Investors engaged in such farming will benefit from a non-permanent loss calculator. Managing by “non-permanent” can save investors thousands of dollars.

10. Don’t navigate the phases of the market

Like regular exchange markets, the cryptocurrency market has growth, accumulation and decline periods. Therefore, during periods of recession, it is preferable to keep funds in stablecoins, and during periods of growth, move the balance towards more risky investments.

Various indicators can help determine the current phase of the market:

• a time before halving;
• All-season and bitcoin market share;
• index of fear;
• capitalization crypto market;

11. Unconditionally trust software solutions (robots) 

Trading automation solutions (robots) don’t guarantee income. They may stop working and be hacked; such a system’s algorithm may not consider market changes. Therefore, you need to control their work even when using robots in your trading.

12. Have an advantage in the portfolio in favour of aggressive coins

Do not overload the portfolio with high-risk coins that have multiple growth potentials. In the event of their fall, the portfolio will sag significantly. Therefore, it is necessary to strike a balance between aggressive investments, “blue chips” among cryptocurrencies and stablecoins.

It would help if you also considered dividing the portfolio into two components – separately for medium-term and long-term investments and separately for daily, short-term trading.

13. Diversify your portfolio too much

Do not overload the portfolio with assets. For example, it is difficult and time-consuming to keep track of many coins effectively; their changes are complex and time-consuming. Therefore, it seems optimal to have 7-12 different assets in the portfolio.

14. It’s not enough to diversify your portfolio

Don’t overload your portfolio with assets. It seems optimal to have 7-12 different investments in the portfolio since it is difficult and time-consuming to monitor a lot of coins and their changes effectively. 

15. Do not close unprofitable positions

Holding a position, by all means, in the hope of a coin growth is dangerous. If the work went against the initial forecasts and plan, it is necessary to understand why. And it would help if you had a pre-prepared plan if the price moves against the position. Locking in a 25% loss is much better than losing 90%.

16. Trust public figures

Public figures can promote and advertise this or that coin or project while they will not be included in them. However, publicity and the presence of a broad audience do not guarantee expertise or honesty. Any decision to invest in this or that project is the full responsibility of the investor, who must decide based only on his analysis of a project or coin.

17. To ignore the marketing component of the project

The project can be perfect and reliable. But if many people do not know about it, then money will not come to it, and it will not receive development. Marketing is critical. If any project does not pay due attention to marketing, the expectations of its value growth are likely too high.

In the crypto market, those who approach investments consciously follow financial plans and do not give in to emotions when trading or investing to earn money. 

In general, recommendations for investors and traders can be summarized in three main points:

• think about the safety of your investments;
• remember that you do not have all the information;
• don’t trust anyone unconditionally.

How to avoid mistakes when trading cryptocurrencies   

Let’s look at some common mistakes traders make in the cryptocurrency market, which are pretty easy to avoid if you know about them.

Every day, buying cryptocurrencies becomes more accessible and more transparent for a wide range of users. Exchanges, centralized and decentralized online brokers allow you to buy and sell crypto assets without the participation of traditional financial institutions with high commissions and restrictions.

The basic idea behind cryptocurrencies is their decentralization. They allow you to make transactions between users directly, bypassing third-party intermediaries, who guarantee the security of assets and trades in the traditional financial system. In the world of cryptocurrencies, the user himself is responsible for his purchases.

Let’s look the most common mistakes made by beginners and even experienced crypto investors and separately focus on how to avoid these mistakes.

Loss of cryptographic keys

Cryptocurrencies operating, as you know, are based on blockchain technology that, thanks to the decentralized distribution of the data registry, allows you to ensure high reliability and security of digital assets and transactions. But, on the other hand, it imposes on users the responsibility for the safety of their assets and the secure storage of keys to the crypto wallet.

When performing cryptocurrency transactions, private keys are used to confirm them. These keys are a kind of pass to the user’s wallet. However, unlike traditional passwords and pins, they cannot restore in case of loss. Therefore, it is essential to store these keys so that you do not lose them and do not allow them to fall into third parties because, in this case, an outsider can gain access to the wallet and steal or use all the funds there.  

Losing cryptographic keys is the most common mistake that crypto investors make. According to a Chainalysis report, of the 19 million bitcoins (BTC) mined to date, more than 20% have been lost due to forgotten or lost keys.

Storage of crypto assets on the exchange

The easiest way for a user to buy cryptocurrency is through a centralized crypto exchange. When purchasing a cryptocurrency on the exchange, the investor receives it on his wallet opened on the exchange itself. These funds are stored in the exchange’s wallet, which broadcasts its clients the number of their assets. Storing cryptocurrencies on the exchange carries risks: the business can block them at the request of government agencies, or according to its Know Your Customer rules, the conversation can be hacked by hackers and steal funds.

There are examples of a large number of hacker attacks on cryptocurrency exchanges, resulting in millions of US dollars worth of crypto assets being stolen. A safe way to store your crypto assets is to withdraw them to a hardware or software wallet after buying them on an exchange.

Loss of seed phrase

When registering a cryptocurrency wallet, a seed phrase is generated, consisting of 12 or 24 words. The seed phrase is required to generate keys for a crypto wallet. Knowing the seed phrase, you can access the wallet in case of it’s lost.

Necessary to securely store the seed phrase printed or written down on paper. It helps restore access to the wallet in case of a device breakdown, software violation, or the need to use the wallet on a new device. Many traders have lost access to their funds due to a broken computer or phone or their loss and lack of a seed phrase to restore access.

It would help if you did not store the seed phrase in electronic form, written down in any document or as a screenshot. There are quite a few cases of hacking devices and stealing this data.

Fat finger syndrome

The “fat finger” syndrome is the input of trading order parameters that do not correspond to the trader’s intention. For example, an extra zero in the application, or vice versa, the absence of one digit in the application, or even an error in the data after the decimal point, can lead to significant losses.

Examples of such errors include the case where the DeversiFi platform mistakenly paid a fee of $24 million. Another example is the sale of the famous NFT Bored Ape for $3,000 instead of $300,000.

Error in the recipient address

Should carefully check the address for sending crypto assets because it will be impossible to return them in case of an error. But unfortunately, it is also a fairly common mistake. It is because it cannot reverse transactions on the blockchain, and, unlike traditional finance, there is no one on the blockchain to call and ask to cancel the transaction or contact the recipient.

Such an error can be critical for a crypto portfolio. There are isolated cases where incorrectly sent funds were returned; for example, Tether, the USDT stablecoin issuer, was able to produce about $1 million in 2020 to users who sent their funds to incorrect addresses. Although this is a story with some exceptions, in most such situations, returning erroneously sent cryptocurrencies is impossible. You must be extremely careful when entering the recipient’s address and remember there is no way back after sending the transaction.

Over diversification

To form a balanced portfolio in conditions of increased volatility in the cryptocurrency market (and in the world of traditional financial instruments), investors resort to portfolio diversification, investing their funds in many different assets. However, investing in a relatively large number of assets can have negative consequences.

Excessive diversification can result in losses because funds will be invested in inefficient crypto assets. Therefore, it is necessary to use only those instruments whose value can be verified and conduct your analysis of crypto assets before investing your funds in them.

No Stop Losses

Stop-loss is a protective order automatically placing an order to sell an asset if its price goes against the investor’s position. This order allows you to limit losses or lock in a trader’s profit.

Many investors have suffered severe losses because they did not have stop -losses or set them incorrectly. However, it should also remember that even a correctly set stop loss may not work if the asset price moves sharply.

In any case, you should set a stop loss, as it will save the trader’s deposit in the event of an unfavourable movement in the asset price. 

Conclusion

Trading and investing in crypto assets are associated with high risks and do not guarantee profitability. As in traditional trading, consistency, adherence to the trading and financial plan, discipline and knowledge are of great importance here. In the blockchain world, the responsibility for your assets is directly their owner, so you should take it seriously to understand the various aspects of the market and learn from the mistakes of others before you start investing in crypto assets.

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