Cryptocurrencies have been around for less than a decade and cryptocurrency trading for an even
lesser time. While it keeps getting popular with every year - a large chunk of cryptocurrency traders
joined in last year after the massive boom in cryptocurrency prices. Considering that the markets are
very young, there are bound to be a number of mistakes which novice traders make.
While it is said that one learns by making mistakes - it is also essential to learn from others’ mistakes.
Let us take a closer look at some of the most common cryptocurrency trading mistakes that new and
novice users tend to make. Being forewarned about these mistakes ensures that you are forearmed
when it comes to trading and you do not repeat the same mistakes.
Common Cryptocurrency Trading Mistakes:
1. Investing Than You Can Afford To Lose
One of the most common mistakes that new cryptocurrency traders tend to make is that of investing
more than what they can afford to lose. What everyone must realize before they invest into cryptos is
that the cryptocurrency markets are extremely volatile - and that there are no guarantees in the
market. The funds that one invests in the cryptocurrency trade must be spare funds which would not
affect the day to day life of a trader even if the entire amount is lost to $0.
Sometimes, when the markets are booming, some traders take a leap of faith and invest more than
what they can afford to lose. However, if the market trends get reversed and the currency loses
price - the money will be lost! There have been cases where people have taken loans to invest in
cryptocurrencies but have lost all the money as well as the mortgage. Investment decisions must be
made based on the capacity to bear a loss. One must never invest beyond what they can afford to
lose.
2. Lack of Research
Another common mistake that new cryptocurrency traders often make is that of investing in
cryptocurrencies without properly researching about them. One needs to research about the
cryptocurrency that they are about to invest in - especially if it is a new name in the markets or an
obscure currency. The process of research involves asking a number of questions. These questions
should be like:
- Does this currency solve a problem?
- Does the problem that this currency solve improve any aspect of my life?
- Is their solution to solving this problem practical?
- Are all the addresses and founders listed properly?
- What are the social media conversations around this currency?
- Are the founders real people or stock images?
If the answer to most of these questions is on a positive note, you should then proceed to check out
the white paper proposed by the currency. Does the white paper look legitimate? Is it detailed enough?
The founders need to be looked up properly. Many a time fraudulent currencies make use of stock
images to depict their founders! Sometimes, websites also look quite low effort. Look up the social
media profiles of these people - are they really who they claim to be? Are they an expert in their
domain? All of these questions need to be looked up and researched before investing into a
new/obscure currency. Many traders do not look up about the currency that are about to invest in and
end up losing their money! This is particularly important when dealing with ICOs.
3. Trading Without A Proper Strategy
A proper strategy needs to be in place before you begin to invest. This strategy needs to be in two
terms - in terms of the budget as well as in terms of the time you plan to invest. Strategies can be
long-term, mid-term or short-term. Targets and Stop Losses need to be set accordingly. If the price of
a currency you are about to invest in is $100 currently, and you plan to invest for 4 months and wait
for a price of $500 then you need to be patient till one of the two criteria are met.
Similarly, a proper budget and time needs to be set out and targets and stop-losses need to be made
accordingly. In cryptocurrency trading, an exit strategy is very important - because having a clear-cut
target in your mind can help you make a better decision.
While there is a strong need for an exit strategy, an entry-point also needs to be decide. Do you want
to enter the markets during a dip in the prices or do you want to enter the markets when the prices
are rising, so that you can capitalize on the bullish momentum? These strategies need to be
established before beginning to trade!
4. Trading On The Basis of Price and Not Market Cap
Another avoidable mistake when it comes to cryptocurrency trade is that of choosing a currency
based on its price and not on the basis of its market cap. When comparing the performance of two
cryptocurrencies over a given time period, the correct indicator of performance is on the basis of
market cap and not the price.
Price can be used as a performance indicator when you want to compare the growth of one currency
over time but can’t be used to compare two currencies. For instance, Ethereum at $500 is a stronger
cryptocurrency by market cap when compared to Bitcoin Cash at $775.
5. Not Diversifying The Funds
When it comes to the most common mistakes that new investors make - the lack of diversification
is another key concern. Having invested in multiple currencies ensures that your profits and losses
are distributed among the performance of various currencies. Owning only one currency would mean
that you are entirely dependent on the price performance of that one currency. However, when
multiple currencies are involved, it ensures that you can reap the maximum benefit out of the profits
any of these currencies makes.
6. Not Keeping Up With News
Investors need to keep up with the news at regular intervals because much of the movement of the
markets is decided by external events that happen beyond the control of the markets. A statement
made by the finance minister of India can have the impact on cryptocurrency prices in the US and a
move from the US SEC can cause the European markets to feel the pain. Hence, it is critical for
investors to keep in touch with international news to be aware about any incoming price fluctuations.
The best way to stay away from these mistakes is to keep yourself updated about the latest going-ons
play safe.
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