The cryptocurrency has grown significantly since the launch of Bitcoin in 2009. It has gone from a niche online currency that began as an experiment to an SEC-approved asset class. Over the years, there have been many stories of cryptocurrency investors establishing themselves on the markets.
Now that time has passed and an entirely new industry surrounding cryptocurrencies has emerged, there are still a few things newcomers get wrong about cryptocurrencies. Below, we highlight the top 3 things people still get wrong about basic crypto investments.
#1. Lack of knowledge about cryptocurrency
Some people invest in cryptocurrency without having done any initial research. This is a bad decision regardless of asset class. It is common to believe that crypto is a scheme to get rich quickly, leading some to jump into complex cryptocurrency exchanges and DeFi platforms. Caught up in the hype, rising investors may be inclined to ignore simple and stable opportunities for returns such as the average cost of the dollar. A malicious mistake experienced by many is the following advice from obscure crypto-influencers who are not experienced experts or have an agenda.
A basic understanding and education about what cryptocurrencies are, how they work, and how to keep them securely will take newbies a long way. Becoming familiar with which coins have been in circulation the longest and have earned their reputation will help you learn the strings. Larger cryptocurrencies like Bitcoin and Ethereum are the most stable and are a good starting point for building a cryptocurrency portfolio and your crypto-literacy. So it is advisable not to jump into “altcoin” right away. Diving headlong into an obscure cryptocurrency as your first token (e.g. the Squid Game token) isn’t the brightest of ideas.
One area that all newcomers need to learn is selecting, browsing, and buying cryptocurrency from an exchange. Not all exchanges are created equal, nor are they all reliable and secure. There have been a number of cases where exchanges have scammed investors using their platforms. Another common occurrence is trade failure which results in the total loss of customer deposits. This has famously happened to Mount Gox and, more recently, FTX.
Finally, a little crypto-literacy will go a long way. For example, learning early on how to use and store assets within a hardware wallet will prevent the all-too-common scenario of your favorite exchange from failing. Familiarize yourself with the phrase “not your keys, not your cryptocurrencies.”
#2. Poor trading strategies
This is easily the most common mistake made by crypto investors, especially new ones. Cryptocurrency is a relatively new class of assets with value propositions that new investors may not be familiar with. It’s the same advice Warren Buffet gives, “invest in what you know.” If you’re new to cryptocurrency, then you’re investing in uncharted waters. You may be out of your depth and find yourself suffering losses.
There are many ways to invest in cryptocurrency, or any asset for that matter, and complicated strategies are usually not the best option. Similarly, even half-baked strategies generally don’t end in success. Short-term thinking has been the downfall of many cryptocurrency traders who are glued to their screens 24/7. High volatility might make this an enticing behavior to achieve, but choosing a strategy and sticking to it can get you through the turbulent markets.
While keeping an eye on your investments is an important part of wealth management, following it consistently does not guarantee your success. Risk management is the critical component to any good trading strategy, and finding the risk management profile that works for your strategy takes time and dedication. It is common to make mistakes at first, but those will smooth out with practice.
#3. Ignoring fees
Fees play an important function within the cryptocurrency space. For exchanges, they are a component of revenue that keeps them open and operational. For the cryptocurrency network itself, fees are required by transaction processors as an anti-spam mechanism. Fees are a necessary part of the cryptocurrency environment and, at some level, will be inevitable.
While it is important to prepare for success, you will need to factor in fees in any trading strategy. Ignoring fees completely will result in decreased returns for unforeseen reasons. Each transfer and trade will incur a fee. Therefore, it is important to take into account the fees in the mathematics behind whether your strategy or investments are profitable or not. Unless you are a sophisticated high-frequency trader, the rule of thumb is “less is more”.
Conclusion: Research first, then invest
Unsurprisingly, there are more aspects that people commonly get wrong about the basics of crypto investing. For example, investing in cryptocurrencies is not a way to evade taxes. You are still required to calculate and pay capital gains tax on your cryptocurrency investments based on your country and jurisdiction.
As the list goes on, the three elements covered in this document should serve as a good starting point to start your crypto journey. If in doubt, check out a number of guides and resources, such as those found on our site.