10 Bitcoin Trading Mistakes Beginners Need to Avoid
The cryptocurrency markets have become very popular among private investors as the potential for high returns is higher than in any other asset class available today. However, cryptocurrencies are also a very risky investment.
To help you get started without making many of the most common newbie mistakes, in this article, you will find the ten bitcoin trading mistakes beginners need to avoid.
1. Investing in What You Do Not Understand
When it comes to investing, it is very important to only invest in something you fully understand. For example, if you are looking to invest in smaller altcoins but are unsure of their function with the blockchain network that they power, you need to sit down and do your research before you invest in it. That way, you can make up your mind about the future potential that this particular coin holds, instead of just investing in it because it has gone up 100% in one day or someone told you that it is a good buy. Here's our guide, if you want to learn how to evaluate a cryptocurrency before investing in it.
2. Following the Wrong People’s Advice
Another common mistake beginners make is to follow investment advice that they read on social media or on bitcoin forums from individuals who they don’t even know. The Internet is littered full with crypto trading “advice”, much of which is from people trying to talk up the coins that they are holding themselves. In some cases, these coins can even be part of organized pump and dump schemes.
If you are going to follow advice from someone, make sure that they are real experts in their field and not strangers handing out “advice” while hiding under a pseudonym online.
3. Not Diversifying Your Holdings
While there are some individuals who consider themselves “bitcoin maximalists” and only invest in bitcoin, the vast majority of smart investors diversify their portfolio holdings to incorporate a range of different digital assets to reduce the idiosyncratic risk of having just one investment. The right level of diversification allows you to reduce your overall market risk while not having to give up on expected returns.
An example of a diversified crypto asset portfolio would be 40% bitcoin (BTC), 20% ether (ETH), 30% leading altcoins such as Dash (DASH), Litecoin (LTC), and Monero (XMR), and 10% small cap coins such as TaaS (TAAS) and Iconomi (ICN). But again, it’s just an example.
4. Trying to Find the “Next Bitcoin”
Another common mistake newcomers into the cryptocurrency markets make is trying frantically to find the “next bitcoin”. In other words, looking to find the next most promising coin among the close to 1,500 digital currencies available. Needless to say, that will be next to impossible.
Instead, it is better to build a diversified portfolio of promising cryptocurrencies with real-world applications.
5. Having no Investment Plan
Not having a clear investment plan in place is also a common mistake amongst beginners. As an investor, you need to decide how much you will invest. Will it be a lump sum in one go or will you invest a little bit each month? How risky do you want your portfolio to be? Also, you need to decide on profit targets and stop loss limits (i.e. the price points at which you cut your losses).
For example, if you buy a coin and you decide that you will sell it when it doubles in value, you should sell it when it hits your price target and not wait around to see what happens. After all, no one has ever made a loss by taking profit.
6. Not Staying Informed About the Markets
Cryptocurrencies prices are highly news-driven. That means, it is important to follow the news about the cryptocurrency markets - especially in regards to regulations as well as large-scale exchange hacks - as they greatly affect the prices of digital assets.
If you are not informed about what is happening in the market, you will not know why the value of your portfolio is up or down on any particular day.
7. Not Storing Your Coins Securely
One of the most important aspects of investing in digital assets is the secure storage of these assets. The two best ways to securely store your cryptocurrency holdings are either in a hardware wallet such as Ledger Nano S or Trezor or in paper wallets. Since not all digital assets are supported by hardware wallets, paper wallets will be necessary in many cases.
Once you have stored your digital coins offline, make sure you store your hardware and paper wallets in a safe place in your home.
8. Forgetting About Cybersecurity
It is an unfortunate reality that the cryptocurrency markets are plagued with scams and cybercriminals who are after your crypto asset holdings. Hence, it is important to take basic cybersecurity measures to ensure that your trading accounts and wallets are not compromised. That means never clicking on links or attachments from unknown email senders, being aware of the types of crypto phishing scams that are out there and using two-factor authentication on all your exchanges accounts.
Additionally, it is wise not to be too vocal about your holdings when discussing crypto investments in online forums and on social media.
9. Forgetting About Taxation
Given that bitcoin has gone mainstream as an asset class in 2017, tax authorities across the globe have started to take a keen interest in ensuring that cryptocurrency investment gains are being adequately taxed. Hence, it is important to be aware of how your crypto trading income needs to be taxed in your jurisdiction and filing your capital gains taxes accordingly when the tax year ends.
Applications such as CoinTracking or Bitcoin Tax can help you with your cryptocurrency taxation.
10. Investing More Than You Can Afford to Lose
Finally, and by far the worst mistakes beginners can make, is investing more than you can afford to lose. For example, there have been reports about individuals buying bitcoin on credit at the end of 2017 and as we can see now, their investment is worth about 50% of what it is worth then.
Hence, it is important when it comes to investing in cryptocurrencies, to never invest more than you can afford to lose as cryptocurrency is still a very risky asset class.