5 Crypto Investment Mistakes You Should Avoid in 2021
If you have money to spare and you're willing to try a high-yield but high-risk investment, you might want to look at cryptocurrencies.
This story originally appeared on ValueWalk
After a year of uncertainty and financial turmoil caused by the pandemic, many are optimistic that 2021 will be much better and things will start to go back to normal, thanks largely to the rollout of vaccines in some countries. But despite the COVID-related global financial downturn, one sector has bucked the trend and is projected to climb even higher this year. People know it as the cryptocurrency sector, led by Bitcoin.
If you have money to spare and you're willing to try a high-yield but high-risk investment, you might want to look at cryptocurrencies. But before you do, you must be warned that these digital assets are highly volatile and there are equal chances of earning big or going bust. Take for instance the meteoric rise of the price of Bitcoin, which reached almost $20,000 at the end of 2017 only to plummet to about $3,500 in November 2018. With that in mind, it is important to educate yourself about crypto investing and minimize mistakes to get ahead in the market.
Cryptocurrency Investment Mistakes To Avoid
Investing Without Knowing
Whether it's cryptocurrency or any other asset, the first thing to remember in investing is to educate yourself and understand what you're getting yourself into. Before you even invest a single cent, you need to allocate some time in learning about the basics of crypto investing. Crypto investment remains unpredictable and risky and if you don't know what you're doing, you can end up losing money.
Below are some of the basic things you need to know about crypto money:
- It's completely digital and therefore it is not physically represented like metallic coins or paper money. In fact, cryptocurrencies exist only in the digital world or in computers.
- It's universal. You can use digital money across different countries and borders. If you have Bitcoin, for example, you can pay a seller in Australia or Morocco who's also using it. You don't have to think about exchanging it for local currency such as Australian Dollar or Moroccan Dirham.
- It's peer to peer. A crypto transaction only occurs online. So, you can only transfer digital money to another person virtually.
- It's decentralized. You have the sole responsibility of keeping track of your own crypto money. There are no central banks and financial institutions that govern or protect cryptocurrencies and the investments therein.
- It's encrypted. The reason why it's called crypto is that it is "hidden.' Users are given long strings of alpha-numeric codes and are not even required to use their real names or addresses to open a crypto investment.
So, if you invest in this type of asset, you should know that you are responsible for your own money. If you encounter problems with your investment, you can't get assistance from your Central Bank, the Securities and Exchange Commission, or a Depository Insurance Company because crypto is completely decentralized and unregulated.
Thinking Cryptocurrency Is Foolproof
Encrypted does not mean secure. If there's one mistake that newbie investors in crypto markets make, it's thinking that the encrypted nature of a digital currency is enough to make it secure. Encryption makes it confidential, but it doesn't mean cryptocurrencies can't be hacked or stolen.
As mentioned above, this type of asset is decentralized, so keeping your digital money safe will be your sole responsibility. Here are some tips that can keep your investment protected:
- Don't share your keys with anyone. Since cryptocurrency is represented by codes or keys, you need to make sure to keep the codes to yourself. If you need to write it down, keep it inside a vault or a safety deposit box. If you must keep it in a document or text file, be sure that your computer is secure. Once somebody gets your keys, they can use it without your knowledge.
- Don't leave your crypto coins in exchanges for long periods, no matter how popular the exchange is. Although crypto exchanges have security measures in place, they have been a favourite target for many hackers. Thus, you don't want to just simply leave your digital assets in an exchange for a long time and then pray that it won't be hacked.
- Store your crypto coins in a digital wallet. Choose one that offers features and protocols that will best suit your needs and budget. But don't focus only on the features, you also need to check out the credibility, performance, and reputation of the company. It is important to choose a wallet from a company that you can trust.
Not Paying Attention To The Math
When investing in anything, keep your eyes on the prize. With Bitcoin's projected rise in 2021, you need to focus on the profit potential. But how will you know that you are indeed making a profit if you don't pay attention to the numbers?
For example, you need to look at transaction fees. Since cryptocurrencies can be very volatile, it is not surprising to see multiple price changes within a day or even an hour. If you want to take advantage of these changes, you must consider transaction fees because it could take out a significant portion of your gains.
Another thing to remember is taxes. In Canada and the U.S., you need to pay capital gains per transaction. So, if you trade excessively, your profits might turn into losses just because you failed to include fees and taxes into your computations.
Making Crypto Investment Decisions Based on Emotions
HODL, FOMO, and FUD are just some of the acronyms you will encounter in crypto investing. Each of these represents some kind of strategy but are emotion-driven at the same time, which should not drive your investment decisions.
HODL means to hold on to your investment no matter how volatile the market is. This is okay. But sometimes, you just don't have time to wait for a good return on your investment. When that happens, cutting off your losses is a better choice.
FOMO or Fear of Missing Out means buying on the hype because you just want to follow the trend. This is the most dangerous one because you would be susceptible to fly-by-night schemes or scams. Lastly, FUD stands for Fear, Uncertainty, and Doubt. FUD may prevent you from investing in crypto even if the research stats or market sentiments are telling you that it's a good time to invest.
Investing in Just One Crypto
Bitcoin is the holy grail of cryptocurrencies. While it's having a bull run right now, it can still plummet and trigger huge losses at any given period. Therefore, it is best to diversify your digital assets. Many other cryptocurrencies can offer you good returns like Ethereum and Altcoin. Don't put all your money in just one crypto. Much like the old adage in investing, don't put all your eggs in one basket.
In a survey conducted by Deutsche Bank, 41% of investors believe that the price of Bitcoin will be between $20,000 and $49,999 in 2021, up from almost $10,000 in January of 2020. When Bitcoin rises, other altcoins usually follow the trend. This means that cryptocurrencies, in general, are expected to perform well this year.
But just like any other type of commodity or asset, investing in cryptocurrencies can end in huge losses if you don't know what you're doing. The highly volatile market can give you huge profit opportunities, but it comes at a price. You need to learn about the right way to invest in crypto assets. And before you dip your toes, you have to have a high-risk appetite when it comes to investing.