Cryptocurrency does have a reputation. Anyone who has done any research can tell you how it is filled with risks and issues. But truth be told, no system is perfect, and the higher the risks of an investment in crypto, the greater opportunity for a higher reward as well.
Having a good grasp of the risk is an excellent way to navigate cryptocurrency in a safer way. Anyone who has trekked blindly in the jungle in search of a hidden treasure is far more likely to fail or get injured than those aware of the risks. Knowledge of the risks tells you where you can combat them and how you should mentally prepare. As much as crypto is a battle between logic and luck, it is also a mental battle, and understanding the risks plays a major role in how cryptocurrency can work for you. There are three key characteristics that are reflected as risks in cryptocurrency.
First, and this is the key defining factor of crypto, where it has established its reputation of being dangerous: it is volatile. A highly volatile market normally indicates sudden surprising changes can take place at any moment, any time for seemingly no reason. This can have a massive positive effect on a cryptocurrency investor, but it can also be a massive negative factor. This is why it is labeled as a disadvantage (but as an advanced trader, you could use the volatility to your advantage if you have the know-how): because of the major risk it brings to the table. It is not uncommon for the value of crypto to literally drop a couple of thousand dollars within the time span of a few weeks or possibly even a day.
Second, there is a lack of regulation that comes with crypto. This means that the government and central banks have no control over the crypto. This has appeared as a positive factor to those who have a distrust for banks and government because of the lack of control. However, a lot of its volatility comes into play because of this factor, and you have to keep this in mind.
Third, because cryptocurrency works in the online digital realm, it means it is an active target for both errors and hacking, which unfortunately can occur. There is absolutely no perfect way or code to beat technical errors or prevent hacking. Although blockchain is seen as an unhackable technology, many hackers focus on two other sources, such as the digital wallet or scamming people to send the money to them in the first place (through emails, calls, and other manipulation tactics). Most scams are quite easy to avoid with a little more thought and steps you can undertake to boost your safety.
Cryptocurrency can be impacted by forks (when the developers do happen to realize that fundamental changes are needed for the cryptocurrency to successfully continue) or discontinuation of trading. Cryptocurrency does carry extra risks, which means you have to do some extra work or research in order to ensure that the cryptocurrency you are working with is trading well. Although these risks are not completely avoidable, the risks can be reduced.
Cryptocurrency is still quite new, having originated from Bitcoin. This is an indicator that there is still a lot to learn from this platform. There are skeptics who say crypto may crash and burn, while others believe it could become a universal currency. However, due to its unpredictability, a lot will still need to change in order for crypto to even be considered as a legal tender on a global basis.
Reducing the Risks
Although it is not entirely possible for you to remove all the risks, you can certainly focus on reducing them through various strategies.
The most obvious and logical tactic to reduce risks while working on crypto is to diversify. This is a common investor trick, used well beyond cryptocurrency investments. Protecting your assets by not placing all of them into a single digital basket is possibly one of the greatest ways to reduce losses if they do occur. However, it also depends on how much you can afford and how much time and energy you are willing to spend on them.
Another common tip to reduce the risks of any investment is through research, and with cryptocurrency, the more research the better. Knowledge is power, and extra time, work, and effort placed into finding out the necessary information can save you a lot of money. This is also important because you can deduce whether or not an investment is actually worth your time, as well as spotting scams and fraud that hide under the cover of good investments. So read the whitepaper (a document that has been released to investors, giving technical information about its concepts and plans) of the specific cryptocurrency of interest, and not merely what is written about it on social media (social media should never be used as a reliable source of information). Do not let laziness cost you a huge amount of money. Dedicate the time and effort to discovering what you need to know about the cryptocurrency of interest.
Double-check if you have the money. This means that you need to look through your financial books and understand whether or not you can actually afford to lose money. This is the number one rule for any investor anywhere, especially for those who have a high interest in cryptocurrency itself: do not invest money that you cannot afford to lose. You do not want to go into an investment in one condition and come out of it feeling a lot worse or in debt. Just don’t do that to yourself. Investing is meant to help you grow your finances, not hurt them.
Keep an eye on your investment. This is not a place you can simply dump and leave the money unguarded. With crypto, you have to constantly monitor the direction it is heading. In order to be able to make a quick pull out due to a drop in prices, or whether the price is skyrocketing, you want to profit from this venture. But due to its volatility, any investor needs to keep a good watch on the direction in which their investment is headed. Simple as that.
Don’t invest in a crypto asset just because everyone else is doing it. There is a mentality called FOMO, where everyone jumps into a trade in Fear Of Missing Out. This is where people are peer pressured into buying an investment that may not altogether be the most logical choice. Rather, make sure you are fully confident in your choice of investments. Only invest if you feel comfortable and if you want to, not because everyone else is telling you to. You are responsible for your own income after all, and therefore, the choice of where you want to invest lies solely on your shoulders. This reduces the risk of falling into traps and scams or outside pressure, and can certainly boost the odds of success when it comes to investing.
Common Mistakes to Avoid as an Investor
When you are starting with new investments, it is not uncommon to make mistakes, especially if you are new to the craft. However, it is actually best if you can avoid mistakes from the very beginning.
Here are some of the most common mistakes investors make that can actually be quite costly. It is best if you keep all of these tactics in mind, and avoid them as best as you can.
The first very big and common mistake is a lack of understanding of how technology works. Doing the research on cryptocurrency is important because it allows you to have an understanding of whether the goals of the cryptocurrency market align with yours. Yet, failure to do the research is one of the most common mistakes people make in the investment world. As absurd as it may seem, this is a trap people very easily fall into because they ‘trust’ the people advising them, without first making sure the other parties are trustworthy.
Overtrading is a mistake committed by people who start out in trading. Many beginners love to trade 20 times a day, but I can tell you right here and right now that this tactic is very dangerous. Many people lose fees or make losses for jumping blindly and hastily into a bad trade, which could have been avoided with a little more patience and perseverance. There is the harsh reality that 20 good trades just don’t exist, and even if they do, the odds of you making or discovering the right ones are near impossible
Thinking of cryptocurrencies as shares is a third common mistake. Cryptocurrency does not normally work like stocks, nor do you have any form of ownership or claim to the company who designed them. So even if a company itself is doing well, it doesn’t mean you will receive the benefits as an owner of the crypto. It is fully possible to have cryptocurrency’s value sinking while the value of the company itself is rising.
Chasing cheap coins might seem like an appealing option, especially if you are on a tight budget, but this can cause a lot of problems and mistakes for you as well. Many people purchase cheap coins with hopes of receiving higher returns, forgetting to check the multiple factors that can get in the way, such as the real-world value and the volume of trading taking place with the coin at hand. Some coins are cheap just because they are bad, and they are not getting any returns in the long run.
Another common issue is leaving all the coins you have on your exchanges. You may be wondering what the issue is here, but the problem is if you don’t have control of your keys, you do not have control of your coins. Leaving coins on exchanges for long periods of time exposes your coins to increased dangers of hacking and cybercrime. Your coins will certainly be more secure in your digital wallet, where you keep your keys stored as well. When you leave the coins you have on the exchange you are leaving the coins in the hands of the software’s security instead of your own, which in and of itself should be quite daunting, considering exchanges are hotspots for hackers.
Not owning a hardware wallet when you are investing quite a bit of money into crypto is another mistake. What is a hardware wallet? These are wallets that are disconnected from the internet, meaning they are not always exposed to such a connection and are far more secure than wallets that are stored online. Hackers can only access such a wallet by physically stealing the device and knowing the password to access it. This makes safeguarding your crypto a lot easier than trying to fend off online hackers.
Falling for social media propaganda is also a common mistake. Social media is used to communicate and talk about practically anything and everything. And seeing negative/misleading headlines is not old news. However, headlines are often exaggerated for clickbait and can cause a flurry of panic or rushed decisions, especially when it comes to crypto. At the end of the day, social media is not a platform you should rely on except for picking up the occasional trends, nothing more.
A lack of understanding of the charts and fundamentals is something you should avoid. There are a lot of opportunities to learn how they work before placing a cent into investment. Charts and fundamental analyses are key ways of understanding the direction in which an investment is headed, as well as picking up patterns and developing strategies. If you lack the basic knowledge of these tools, then you are setting yourself up for failure. This is a common mistake you cannot afford to make.
Another common concept that many traders do not understand is market dynamics. Cryptocurrencies are all connected in their own way, and there exist more coins than Bitcoin (which is normally seen as the face of cryptocurrency). Make sure you have a proper understanding of how the market works, and this is best done by looking deep into the history of many of these coins, and how they are linked together.
Paying too much in commissions and fees is a costly mistake that can swallow up all your profits in one go. You need to be aware of the exchanges you work with and the trades you make. The costs can tally up, allowing you to pay excessively high fees, which may have been avoided had you made different decisions of whom to use. Especially if you do decide to use a broker, you need to be careful in your choice, as some charge excessively high fees. Do the necessary research on the prices of services before jumping in and consider the following: one charge may not seem like much, but multiply it by 10 and what do you get? Suddenly the fee seems a lot higher for a relatively small amount of transactions or commissions.
Working with the wrong advisor is another common mistake. You should work with a partner who has the same investment goals that you do, and make sure that you have similar training ideas, and that they perhaps have better experience than you (especially if you are a beginner). But don’t follow anyone’s advice blindly without double-checking and verifying the reasoning first.
In the end, there are still many mistakes which you can make. Consider getting yourself a tutor even to help guide you in the beginning and help you prevent any mistakes they may have made when they are younger. You are indeed setting yourself up for better success by focusing on learning from those around you who have a proven track record of success.
