In a market that is fast, global, always open, and unregulated, anything can happen – it is a lot one can do wrong. In the following I will go through some of the pitfalls in crypto you might want to avoid, and how you should handle them to become successful in crypto land.
If you are involved in crypto projects on Discord or Telegram you have probably noticed that there are a lot of scammers out there, at the same time we shop crypto like groceries: “impulsive and emotional based shopping” – the perfect customer of a scammer. These are the two most common pitfalls of crypto investing. In the following I have put together five topics which are good to follow if you want to avoid the most common mistakes one makes as a crypto investor.
Do not send money to operators that sell you the idea “Guaranteed Return”!
If you come across marketing from a platform that claims guaranteed returns, a big red flag should appear on your screen, and you should keep your wallet as far away as possible. No one in this world can guarantee you a "guaranteed return". Especially not platforms that offer sophisticated trading algorithms that pretend to create profit through frequent trading and arbitrage across exchanges. The arbitration battle is brutal, and the battle is between private players you cannot invest in.
Behind the scenes, you place your money in a pyramid platform that can handle moderate withdrawals if they receive more deposits than withdrawals. This is a house of cards that will always fall, and you must never find yourself using such platforms that guarantee a return on your bitcoins. These platforms are spread through referrals, intrusive phone calls or emails, as well as in social circles. Unfortunately, many people fall for these scams. You can often avoid such actors through a quick Google search. Alternatively, such platforms can be avoided through a rational thought process. There are players who promise a weekly return of 2%. The compound interest effect implies an annual return of 157%, which is completely unrealistic to achieve over time.
Make sure the exchange has a license to trade!
Crypto scammers appear in many different forms. The least obvious and most shocking fraud can be found in FTX's collapse. It was difficult to identify. Nevertheless, there are a couple of principles that you could follow to avoid being cheated by a fraudulent international exchange run by crooks.
The challenge of trust: A central point in Bitcoin is to be less dependent on trust by removing the need for the middleman. Your Bitcoin is your bitcoin, under your control, that you can send wherever you want.
The middleman still occurs the moment you use fiat currency to buy Bitcoin on a crypto exchange. Many people leave the crypto on the exchange because they believe that the exchange will behave properly over time.
FTX was an exchange where many people could buy and sell cryptocurrency, you could trade derivatives and the platform looked very sophisticated. FTX had complex financial instruments, a base in the Bahamas and a broad international profile.
What was going on behind closed doors at FTX could not be known in advance. But you could have acted and avoided the exciting and unknown for the simple and close. Today, there are several stock exchanges that are registered with a license. Obtaining a license as a crypto exchanger is a very painstaking process and players who have gone through these steps have all been through several rounds with financial authorities. Often, they also have bank connections, and offer simple forms of buying and selling that are not exposed to financial imbalances that can arise on a derivatives exchange.
Stick to Bitcoin and Ethereum or projects you know!
A classic mistake many people make in crypto is to search for cryptocurrencies that can become as big as bitcoin and Ethereum. There are very few, if any, that can come close to the first and last-mentioned cryptocurrencies. Nevertheless, we should never say never, suddenly an underdog comes out of nowhere that only a few had faith in – HIVE!
The point is that there are an incredible number of cryptocurrencies, and an extremely large number of these are fraudulent castles in the air seasoned with bloated and exciting jargon and utopian visions of the future. Avoid it like the plague and continue to build Bitcoin, Ethereum and Hive.
Avoid daytrading!
Over 90% of people who trade daily end up losing on day trading. While you trade daily, the exchanges earn commission from you, which you lose. In addition to the losses, you encounter problems because of the inability to predict the future and the fact that you must pay tax every time you realize a profit. I'm thinking, with so little edge, I think it's best to stay far away. In any case, don't do it by taking out a loan – do it with money you can afford to lose.
With the volatility of crypto, you can be right in your assumptions about direction, but end up losing everything if you trade leveraged. In the bull market of 2020 and 2021, Bitcoin went from $3,000 to $69,000. On the way up, Bitcoin had a series of brutal and rapid drops of 20-50%. Leveraged positions were forcibly sold in the rapid declines. Many traders were right in their assumption that the market was going up but ended up bankrupt on the journey. Not to mention tax, every time you sell Bitcoin with return you will need to pay tax from that return.
The edge is not with you my friend.
Do not invest based on emotions!
Ignore the feeling of missing out on upside or the need to capitulate when everything is in the red. Have a predefined strategy and follow it slavishly. Many people buy crypto when it's hot and sell it when it's dead. This is completely natural and normal behavior because of the very tabloid- and headline-grabbing media image surrounding crypto.
Try to think the other way around - buy when everyone is selling and sell when everyone is buying. Alternatively, get out your notebook and write down reasons why you are buying today, and plan for when you might sell. My tip is to forget newspaper headlines.
A cheeky variation that I always talk about in my blog posts that worked quite well is a portfolio where you have 20% in crypto, and 80% in other more solid markets. Once a month you step inside your wallet or whatever and you do a rebalancing of your portfolio.
Do you know of any crypto pitfalls that I did not mention in this blog post? Please leave a comment.
I am Olebulls and I’m working in IT and Finance. I’ve always been passionate about finance and finding smart ways to manage and save money. I believe establishing money management strategies as early as possible is the key to securing your future. I began using different strategies myself in real estate, stocks and crypto and I have now built some decent amounts.
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Disclaimer: This is not financial advice. I am not an expert. You should do your own research before investing.