10 Costly Crypto Investing Mistakes and How to Avoid Them

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Avoiding common mistakes is crucial for successful investing in the volatile cryptocurrency market, Investors should conduct thorough research to avoid scams, misinformation and rug pulls. Emotional decision-making based on fear and greed should be replaced with disciplined strategies like diversification and risk management.

Dreams of 100x returns can entice many to try their luck in the cryptocurrency market. But what if you did not have to depend solely on luck and took it upon yourself to become a better crypto investor?

Here are some common mistakes that investors tend to make in their journey. This article is not going to ensure 100x returns, but it will certainly help you navigate through the highly-volatile market and avoid mistakes that others made in the past.

10 Common Crypto Investing Mistakes to Avoid

1. Not Doing Your Own Research

Let’s begin with a common phrase used by cryptocurrency enthusiasts: do your own research (DYOR).

The cryptocurrency sector is known for its scams, hacks, and misinformation. As an investor, it is your responsibility to verify the credibility of crypto tokens and projects before investing in them.

Investors must also be aware of the use of celebrities and social media influencers to promote crypto tokens. Shilling is a common practice where people hype up tokens that they are already invested in on social media, newsletters, and other platforms in order to persuade the public to buy these cryptos and drive up the price.

The chances of making a bad investment based on unverified information on the internet are high. Therefore, DYOR is a mandatory step in responsible crypto investing.

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2. Participating in Rug pulls

Sticking to the topic of DYOR, investors that are new to the crypto market need to understand that setting up a crypto project is easy given the no-code tools and solutions available today. Anyone can set up a website with a well-written project plan and create a smart contract to mint a new form of cryptocurrency.

This brings us to rug pulls. Rug pulls are a common crypto scam where the developers abandon the project and run away with the investor funds. Now if you own a token of an abandoned project, the token price will likely drop to zero and leave you with irrecoverable losses.

How to avoid a rug pull?

  • Verify the website and social media channels of the project;
  • Check if the founding team is a reputable name in the industry;
  • Check the age of the crypto tokens – avoid tokens created in the last 24 hours;
  • Use tools such as DEX Screener to check if the trading of the token is pausable, to check if the token has low market liquidity;
  • Be aware of newly-minted tokens that have surged in the past 24 hours as scammers use FOMO to entice potential investors.

3. Succumbing to Emotional Decision-Making

You should always be mindful of your emotions when making investment decisions. The two most powerful emotions in investing are fear and greed. This is true for all risk-asset markets, including crypto and equity.

Emotional investing is a big reason why so many investors buy at market tops and sell at market bottoms. Greed can push an investor to buy the hottest cryptocurrency, the one crypto that is the talk of the town after surging over the past week. The hope of gains and the fear of missing out (FOMO) can push the investor to buy the crypto without conducting due diligence.

Market participants need a sound investment strategy and discipline to reduce the risks of emotional investing. These strategies can be as simple as diversification, dollar-cost averaging, and using stop-losses.

4. Neglecting Diversification

Crypto portfolio diversification is a simple and effective way to protect your investment. This strategy follows the age-old wisdom of “not putting all your eggs in one basket.”

The crypto market is a highly volatile one, and the sector itself is still developing. If you concentrate all your investments on one token, you will expose your portfolio to market uncertainty.

What if the project you are invested in gets hacked or loses market share to a competitor over time, or becomes obsolete due to the emergence of new technology? Investors have to acknowledge the future is unpredictable and must account for the worst-case scenarios when making an investment.

5. Ignoring Common Risk Management Tools

Investment risk management tools like stop-loss and buy-limit orders have been created from decades of risk asset market experience. Cryptocurrency traders should practice using these tools to protect themselves from market volatility, book profits, and limit losses.

A stop-loss order will automatically sell your tokens if it falls below a specified price. Similarly, buy-limit orders ensure that you don’t pay more than a specific price for a token.

Both tools help investors navigate volatile markets. These tools are very easy to use and can be incorporated into your crypto trading strategy seamlessly.

6. Misusing Leverage

The use of leverage in investing is a double-edged sword. Experienced investors can make extra profits from their available capital by using leveraged derivatives such as options and futures contracts. These investors acknowledge the risk and reward of debt-fueled trading and typically practice risk-management strategies to minimize losses.

However, if an investor uses leveraged financial derivatives without acknowledging the potential of limitless losses and without proper risk-management strategies, they can ruin their financial well-being.

7. Fumbling with Crypto Wallet Operations

Crypto wallets are the gateway to the crypto world. These act as your personal vaults that you alone are responsible for. As a crypto investor, you must safeguard the private keys and recovery phrases that give access to your wallet. You can even use hardware wallets (cold wallets) to ensure the highest grade of wallet safety for yourself.

A common mistake that crypto investors make is mistyping the wallet address. If you are sending tokens to yourself or to a friend, it is critical that you send them to the correct wallet address. Even a small typo will result in your funds being lost forever.

8. Bypassing Non-Custodial Wallets and DeFi

Sticking to the topic of crypto wallets. Crypto investors are encouraged to explore moving their tokens away from accounts managed by centralized corporations to their own non-custodial wallets.

The phrase “not your keys, not your crypto” echoed throughout 2022 as thousands of crypto investors lost their money after prominent centralized crypto exchanges and lending platforms went bankrupt. Customers of FTX, BlockFi, Voyager, Celsius, and Gemini Earn are still fighting for are still fighting to retrieve their crypto tokens.

Yield-seeking investors can tap into prominent decentralized finance (Defi) protocols like Aave and Uniswap to earn interest on their crypto deposits.

Again, we must point to the advice of DYOR before using DeFi applications.

9. Not Keeping Track of Fees and Taxes

Investors tend to ignore the transaction costs and platform fees incurred when buying and selling cryptocurrencies. It is important to keep track of these expenses as they will directly affect your profit/loss from crypto investing/investing.

Furthermore, crypto investors have to be aware of newly-created crypto tax laws that they may need to comply with, depending on their geography. A number of countries, including the U.S. and India, have imposed capital gains taxes of over 30% on crypto. Some governments have also imposed additional tax deducted at source (TDS) on crypto trading.

10. Overrelying on Technical Analysis

This is a tricky one. Day traders and short-term investors use technical analysis to identify buying and selling prices of an asset. While technical analysis strategies have been honed over decades of market experience in the equity market, they may not always work in crypto markets. Cryptocurrencies are different and have unique market forces that shape their performance.

While technical analysis is still encouraged, crypto investors must be aware of a cryptocurrency’s tokenomics to anticipate the end of the vesting periods, whale activity, and emission schedules, all of which can undermine your investment strategy built using traditional technical analysis techniques.

The Bottom Line

The message is clear. Do your homework, don’t trust the internet, and don’t give in to FOMO. When you have money on the line in the market, it may be difficult to remain disciplined during a sell-off or a price surge. However, implementing simple risk-management strategies and emotional mindfulness can make a big difference.

Remember to diversify your portfolio and prioritize security when it comes to crypto wallets. Never invest more money than you can afford to lose.

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Mensholong Lepcha
Crypto & Blockchain Writer
Mensholong Lepcha
Crypto & Blockchain Writer

Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.