The Top 10 Pitfalls of Crypto Investing and How to Dodge Them
Cryptocurrencies are gaining increasing popularity as a new asset class for investing. However, as with any new investment opportunity, there are risks involved. This post will cover the top 10 pitfalls of crypto investing and provide strategies to avoid them.
Pitfall #1: Lack of Basic Crypto Knowledge
Many new investors are attracted to the hype surrounding Bitcoin and other cryptocurrencies. However, it is important to know that investing in crypto requires understanding the asset class and how it works. Investing in an asset you don’t understand, or trying to trade crypto without understanding the basics of how cryptocurrency works, is a recipe for disaster. Taking time to educate yourself on different crypto projects and the goals of each crypto company will make you a better investor.
Book recommendation: "Mastering Bitcoin: Unlocking Digital Cryptocurrencies" by Andreas M. Antonopoulos
This book is a comprehensive guide to Bitcoin, making it a good starting point for individuals interested in learning about the fundamental aspects of cryptocurrencies.
Pitfall #2: Ignoring Fees
While there are many ways to buy crypto, new investors might just jump into purchasing crypto without understanding how the gas fees work on exchanges. For example, buying crypto with a credit card may come with massive surcharge fees (e.g., 3% or more) and could also come with additional charges from your card company. Learning which crypto exchanges offer low fees and the best method of purchasing and trading crypto can be more budget-friendly in the long run.
Book recommendation: "The Age of Cryptocurrency: Bitcoin and the Fight for the Future of Money" by Paul Vigna and Michael J. Casey
This book talks about the potential of Bitcoin and other cryptocurrencies, including how transactions work, which may indirectly help to understand the associated fees.
Pitfall #3: Short-term Thinking
The promise of “get rich quick” attracts short-term investors. And while there is a possibility of earning massive gains on a crypto investment, losing all of your funds to a bad investment move is a possibility, too. Having a long-term investment mindset will help you choose your crypto investments more carefully and concentrate on picking higher-quality projects with long track records. Trying to get rich in 90 days is a fast way to go broke, but thinking about crypto investing as a multiyear process will help you build a more thoughtful crypto portfolio.
Book recommendation: "Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond" by Chris Burniske and Jack Tatar
This guide can help investors to understand how to evaluate potential investments in crypto, emphasizing the need for a long-term perspective.
Pitfall #4: Keeping Crypto in Online Wallets
Cryptocurrency is a digital currency and requires a digital wallet to store it. Although using an online wallet is more convenient, it is also far riskier than storing your crypto offline. Online wallets are more prone to vulnerabilities, and hackers can drain your wallet through crypto scams or hacks. The most secure way to store your crypto is in an offline hardware wallet, which is essentially a USB stick with advanced hardware and software encryption to protect your crypto private keys.
Book recommendation: "The Truth Machine: The Blockchain and the Future of Everything" by Michael J. Casey and Paul Vigna
This book offers a solid understanding of blockchain technology, the backbone of cryptocurrencies, which indirectly provides information about crypto wallets and their security.
Pitfall #5: Forgetting Crypto Passwords or Seed Phrases
Since cryptocurrency is kept in a digital wallet, these wallets require passwords to access. If you forget your password, your cryptocurrency may not be recoverable. Most wallets have a backup seed phrase to gain access to the funds, but if that seed phrase is lost or forgotten, there may be no alternative option to recover your funds.
Book recommendation: "The Little Bitcoin Book: Why Bitcoin Matters for Your Freedom, Finances, and Future" by Timi Ajiboye, et al.
It offers a simple, accessible guide to Bitcoin, touching on some best practices for managing Bitcoin wallets, which include managing passwords and seed phrases.
Pitfall #6: Wrong Wallet Address
Transferring crypto between digital wallets is how you take custody of your crypto from an exchange, or how you send funds from one party to another. But a common mistake of new investors is attempting to transfer crypto funds to your wallet, only to mistype the wallet address. When this happens, the crypto is sent to an erroneous wallet address and may be unrecoverable. While there are recovery services that may be able to help you with this, they could be very costly.
Book recommendation: "Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction" by Arvind Narayanan, et al.
This book covers Bitcoin's technological underpinnings and gives readers a deeper understanding of how addresses and transactions function, which is crucial to avoiding errors like sending to the wrong address.
Pitfall #7: Getting Scammed
As a new asset class, the cryptocurrency market is full of scammers. In fact, the Federal Trade Commission (FTC) reported nearly $700 million in stolen crypto assets in 2021 alone. These criminals employ sophisticated phishing techniques to gain access to your crypto wallet and convince you to transfer funds to their wallet.
Crypto scams can occur through email or messaging apps, with perpetrators pretending to act in your best interest. They may offer you a deal that is too good to be true, like a guaranteed high return on investment or an opportunity to buy a cryptocurrency at a discount.
Another common scam involves fake ICOs (Initial Coin Offerings), where fraudsters create a fake website and whitepaper to promote a new cryptocurrency. They will then ask investors to send funds to a wallet address, but once the funds are transferred, the scammers disappear, and the investors are left with nothing.
Never connect your online wallet to an untrusted application to avoid these scams, and keep most of your crypto funds in offline hardware wallets. Also, never give out your wallet password, seed phrase, or private keys. Always do your research and verify the legitimacy of any cryptocurrency project or offer before investing. If something seems too good to be true, it probably is.
Book recommendation: "Blockchain for Dummies" by Tiana Laurence
This book gives an overview of what blockchain technology is and how it works, which can be a helpful resource in recognizing and avoiding common scams in the crypto space.
Pitfall #8: Lack of Risk Management
New crypto investors may focus solely on potential returns and forget to consider the risks involved. It is important to have a clear understanding of the potential risks and have a plan in place to manage them. This may include setting stop-loss limits or diversifying your portfolio to spread risk.
Book recommendation: "A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing" by Burton G. Malkiel
Although this book is not specifically about cryptocurrency, it offers timeless insights into risk management in investing, which can be applied to any investment, including crypto.
Pitfall #9:Following Hype and FOMO
Crypto investing can be exciting, but it is important not to get caught up in hype or fear of missing out (FOMO). This can lead to impulsive decisions and poor investments. It is important to conduct thorough research and make informed decisions based on facts and analysis rather than current hypes.
Book recommendation: "The Psychology of Money: Timeless lessons on wealth, greed, and happiness" by Morgan Housel
This book doesn't focus on cryptocurrency specifically, but its insights into investor psychology can be useful in avoiding the pitfalls of hype and FOMO.
Pitfall #10:Lack of Patience
Investing in crypto should be a long-term strategy. It's easy to get caught up in the excitement of quick gains, but successful crypto investing requires patience and a long-term view. Don't make hasty decisions based on short-term trends or emotions. Instead, focus on building a diversified portfolio and sticking to a well-thought-out investment plan.
Book recommendation: "The Intelligent Investor" by Benjamin Graham
It's a classic book in investment literature which emphasizes the importance of patience and long-term investment. Although it doesn't focus on crypto, its principles apply across all types of investments.
To sum up, by avoiding these 10 common pitfalls, new crypto investors can increase their chances of success in the cryptocurrency market. Remember to take the time to educate yourself on the basics of crypto investing, practice good security measures, and avoid impulsive decisions based on hype or emotions. With patience, diligence, and a solid investment plan, you can navigate the world of cryptocurrency investing and potentially reap significant rewards in the long term.
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