I started this blog to help people avoid the mistakes I have made trading Crypto. I get a couple of emails a day from people asking questions and sometimes telling me their story.
Crypto is a tradable asset which shares many characteristics with other markets such as stocks and forex. The innovative technology behind Cryptocurrencies presents investors with the opportunity to make high returns, but it comes at a high risk.
While the term greedy has been bandied around in various emails and comments, trading Crypto does not make you greedy. Any investor is investing to make a profit and why should there be an upper limit to this? Investment is a choice as is the risk profile for the markets we choose to invest in.
The richest people in the world all reinvest their money to grow their capital, but traditional investment markets are difficult to enter. Crypto makes it possible for anyone with an internet-connected device to start investing themselves.
If you want to trade traditional markets, then there are checks in place to ensure that new investors have the experience necessary to start trading and that they understand the risks of what they are doing. Similar gambling websites are meant to activate automated systems to stop you losing too much money. Governments regulate these platforms and companies to protect consumers.
There is little in the way to protect consumers in Crypto. Due to its global decentralised nature, with little to no regulation, it is the wild west of investment, and it is easy to lose money.
This morning I received an email which triggered the writing of this post, the bit that concerned me was as follows:
“I need to make money fairly quickly and would love to know…”
The make money fairly quickly is the thing which clearly concerned me and I would steer anyone who wants to do this away from Crypto investment.
Right now, the majority of Crypto trading is speculative, and while use cases for the technology are on the increase, it is still speculative. What this means is, while investing in Crypto can present investors with a great opportunity to make money, not everyone will. I talked about this in my first Vlog where I discussed the importance of being patient when trading Crypto.
By trading Crypto, there is no guarantee you will make money. This is a highly volatile market, which, while sharing the characteristics of the stock market, is decentralised, unregulated, subject to manipulation and highly unstable.
The Crypto market has a short history, and while it has made significant gains over the last few years, this is no guarantee of future performance as nobody knows what the fuck will happen!
There will be winners and losers and by being a high-risk market there will be big winners and big losers. If you are in the market or thinking of entering you may lose everything you invest. We have a global market cap right now of $149bn, which was $17.6bn at the start of the year and $12bn a year ago, that is a climb of 1,141% in a year.
The market shed 25% of its global market cap in three days after Bitcoin triggered a first wave selloff when it hit $5k, and then China triggered a second wave of selling after it was announced that they were banning ICOs. When stock markets around the world crashed on Monday, October 19, 1987, known as Black Monday, 22.6% was wiped off the Dow Jones Industrial Average. Even The Wall Street Crash of 1929 where the cumulative crashes of 28th and 29th October, 1929, caused the most devastating stock market crash in the history of the United States, the total drop over those two days was under 25%.
Where the stock market can drop 25% and trigger a global depression, Crypto can drop 25% and laugh it off with an almighty rally. Equally, it can go on a two-year bear run as it did after the crash of 2013.
So in this crazy, high risk, volatile world of Crypto trading it is super fucking easy to lose money, all your money. As such, it is important that if you get into this that you only invest what you can afford to lose, and you develop a strategy which gives you an advantage over other traders.
It is essential that you understand what making money is too? While you may look at the value of your assets at the current exchange rate and consider you portfolio in fiat (£, $, € etc.), you don’t have that money until you sell and Crypto is yet to become a universal form of payment. When the market moves in a big wave down, like after the $5k Bitcoin, it is doing so because there are many investors, both large and small who are selling their Bitcoin for fiat. They are doing this because this is the money they spend in the real world to survive, live and buy their Lamborghinis.
So this long intro leads me into explaining the 5 easy ways you can lose money trading Bitcoin and Crypto.
1. Thinking Crypto is a Get Rich Quick Scheme
It is only natural that when a market is flying that there are many new investors wanting to be part of it. When prices rally at parabolic rates there is a constant stream of news or dickheads like me posting videos on the beach saying how well I have done. This is how bubbles form, whether it is the Dot Com bubble, housing market bubble or those fucking Dutch Tulips people keep bringing up. We all want an easy life, we all think that money will do this and when a bubble is forming people jump in.
Crypto is not a get rich quick scheme. If too many people think it is, the prices will go up too quick and the bubble will eventually burst.
It is a highly speculative market where some people have got rich quick, and some have lost money quick. As I mentioned earlier, we are up + 1,141% over the last year and +750% year to date. This isn’t going to continue at this rate forever; there are not enough buyers. It may continue for another week, maybe a month or even a year, but History will tell you that for it to keep going up, then it will need to crash at some point, shake out the weak hands and start another bull run.
Look below at the all time charts for Crypto and check out the little blip in 2013.
Except it wasn’t a little blip, it was a huge fucking crash. It just looks like a little blip compared to what is happening now. Look at the same chart now when I zoom into that period.
The spike in 2013 was driven by speculation, people were pumping money into Bitcoin as it was this new revolutionary money, and then the markets crashed from a global high of $15.7bn on Dec 5th, 2013 to a low of $3.3bn on Jan 15th, 2014. A drop of 79%. Many claimed that this was the death of Bitcoin and Crypto, and it could have been. It took nearly two years of bouncing around for it to get back into a bull market.
Don’t think this can’t happen again.
It can because nobody knows what the fuck will happen. The market may be a very different place right now, the Crypto ecosystem may be more advanced, we may have more utility, but we are still in a speculative market. It can crash at any point.
As such, if you get involved, the golden rule is not to invest any more than you can afford to lose. If you have followed this rule then all your investments should be considered long-term, and by long-term, I mean 3–5 years minimum. Why? Simply because the longest bear run we have experienced is two years. Those who invested in Bitcoin in December ’13 and didn’t panic sell during the crash had to wait until early ’17 to be back in profit. Over three years. A bear market can hit us at any point and if it does then the longest we have experienced is two years and this is our benchmark.
Crypto is not a get rich quick scheme, you might get lucky and hit a bull run, but there is no guarantee. If you treat Crypto as a get rich quick scheme you will likely make poor unplanned decisions, lose money and chase.
2. Day Trading Crypto
Most Crypto traders have considered day trading; many have tried, some with success and some with failure. I have tried and failed and have written before about why I don’t day trade Crypto.
Firstly I am going to deal with lifestyle. I expect that most people who are reading this already have a job, therefore if you are going to day trade Crypto, then you are either going to do this while at work, hiding in the toilets or under your desk or you are going to be doing this in the evenings and on the weekends.
If you are doing this at work you are neglecting your job and ripping off your boss as you can’t just dip in and out, it will be massively distracting. I did the same day trading tech stocks a few years back when I lost a fuck load of money. What will happen is your career will suffer, and your trading will likely be poor as you can’t effectively do both. If you are doing it in the evenings and weekends, then you are potentially neglecting your family or neglecting your health and life.
Day trading is super fucking hard; you have to be glued to the markets and news, following trends and using technical analysis to make scalps. Even then, a quick change in the market can stop you out on all your investments.
If you think you are smart and you can quit your job to do this, then you are taking a huge gamble if you do not have serious reserves. Even if you are lucky enough to have made enough money and do not to need to work you are still entering a super hard market to day trade. I know of a trader this week who was stopped out of all of his investments because of the China news, where if he wasn’t a day trader and held long positions on them all a bunch would have been close to recovery. Each stop was executed at a loss. As such, all those losses need winning back.
The problem with day trading is that markets can operate irrationally in the short-term, things happen which makes no fucking sense at all and you are battling the human emotions of fear and greed.
The chart below perfectly demonstrates the experience the most day traders will go through at some point. We don’t ever really know what the market is going to do in the short-term, so the emotions of fear and greed will cause us to buy and sell at exactly the wrong times.
You don’t need to day trade Crypto. You don’t need to give yourself the stress of finding coin scalps or the stress of huge losses when the market turns. While the market is highly volatile it also acts in predictable patterns.
As I keep saying, investing in Crypto is speculative, what we are speculating is that the digital currencies will become forms of payment and the service based tokens will support systems and technology which will revolutionise markets. If the speculation proves right then the investments will go up. As such, you don’t need to day trade. You need to find technologies you believe in, find a good investment point and then hold your positions through the upwards waves.
3. Margin Trading
I have argued with traders on Reddit over this. Margin trading is whereby you are borrowing to invest because you are using leverage. Let’s say for example you are margin trading with a 10x leverage, therefore for every $1 the price of your buy goes up, you make $10 and equally, for every $1 it goes down you lose $10.
Margin trading breaks the golden rule of not investing more than you can’t afford to lose, because if you could afford to lose this, then you would just make the initial 10x investment yourself.
With margin trading, you are being greedy and borrowing to invest, and you, therefore, run the risk of a margin call. Margin calls suck ass big time.
From Investopedia:
A margin call is a broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when the account value depresses to a value calculated by the broker’s particular formula.
An investor receives a margin call from a broker if one or more of the securities he had bought with borrowed money decreases in value past a certain point. The investor must either deposit more money in the account or sell off some of his assets.
Also, read their article about The Dreaded Margin Call.
If you can’t cover your losses, your trade is closed, and you lose your initial investment. We already know that Crypto investment is highly volatile and super risky. If you are margin trading, you are therefore putting your money at risk. If you are then given a margin call and can’t add funds, then you lose your original investment if the price drops below a certain point.
If you don’t margin trade and just trade your asset as you own it, which is a 1x return, then whatever the market does you still own your asset.
Margin trading is only for the very experienced traders, and even then it is high risk. As someone who has experienced a margin call and lost a significant amount of money, I won’t ever do it again.
4. Shorting Crypto
Shorting is where you are betting on an asset to drop in value and is a useful tool within markets to measure sentiment. The main issue with shorting Crypto is that you are shorting a highly volatile market which is on a two-year bull run. You are trading against the market sentiment.
The other issue with shorting in a bull market it takes you back to being a day trader as you have to track prices closely. And I don’t recommend day trading.
From Investopedia:
Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit. Short selling may be prompted by speculation, or by the desire to hedge the downside risk of a long position in the same security or a related one. Since the risk of loss on a short sale is theoretically infinite, short selling should only be used by experienced traders who are familiar with its risks.
Similar to margin trading you don’t own the asset, and the scariest thing is, identified above, there is theoretically no ceiling on the growth in the price of an asset. Where if you own an asset which is falling, the most it can fall is 100% to a price of 0. An asset can double, triple, 10x in price and as it moves up, you are losing money. Imagine short selling Ethereum before it went on a 4,000% price hike.
Short selling is only for the very experienced. It is a place for the inexperienced to lose money.
5. Not Taking Care of Security
This last one is a factor which investors in the stock market do not have to worry about but should be your primary concern when getting into Crypto. The things which make Crypto easy to trade and spend also make it easy to steal.
There are hackers all over the world trying to hack personal computers and exchanges to steal your Crypto. I have written before about how I expect to get hacked one day and the things I am doing to protect myself.
You need to take security very seriously; one slip up can lose you either a bunch or all of your assets. You only need to search Reddit to find horror stories of people who didn’t set up a two-factor authentication on an exchange, who clicked on a link in a spam email or who went to a phishing website and gave over their details.
Hackers want to target you; they want to steal your Crypto. Be hot on your security and also make sure you buy a hardware wallet like Ledger Wallet or a Trezor.
Conclusion
Don’t get sucked into Crypto being a get rich quick scheme. It is a high risk, potential high reward market. Make sure that you are sure it is for you and if you do invest take your time and don’t get greedy.