The 8 Biggest Mistakes of Crypto Trading
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Cryptocurrencies have made exchange-based trading more accessible to a wide range of users. Instead of long and complicated processes involving the opening of a brokerage account, the crypto market offers a quick and easy way of entering the world of multibillion-dollar trading. Through analyzing the transactions of our clients at Alfacash, we see that many are purchasing coins and then sending them to crypto exchange accounts, which indicates a general desire to get trading.
However, before you start your crypto-trading journey, it’s important to remember the mistakes that often await traders in the world of digital assets. So, let’s take a look.
Mistake #1. An erroneous strategy or the lack thereof
A reason that many amateur crypto traders fail is due to the lack of a clear and properly drawn-up action plan that should be thoroughly thought out before trading can even begin. Young crypto investors mistakenly believe that they will figure it all out ‘along the way’. However, in practice, along the way, they find themselves in the centre of an emotional vortex that forces them to act rashly, causing losses that could have been avoided if the investor had spent time developing a strategy complete with contingency plans before buying. The starting point for any strategy is a fundamental analysis of a range of crypto assets in tandem with a framework of goals. The former task involves a detailed study of various crypto assets that could potentially be included in an investment portfolio. The second task lies in the realm of psychology and general life planning: the investor will have to figure out his level of risk tolerance and the distance to his trading horizon; he’ll have to understand for how long he’s looking to buy assets, the expected or desired rate of return and what losses, during periods of market downturn, he is ready to endure without succumbing to panic. Without these simple but necessary preliminary steps, an investor risks becoming easy prey for more experienced trading sharks, who during periods of market growth will sell their assets to the inexperienced, and during a downturn – will buy assets from them on the cheap.
Mistake #2: Too much ambition
The cryptocurrency market is seen by novice investors as a kind of ‘El Dorado’, wherein a couple of months, one can see multiple returns and multiply investments without much effort at all. This vision is also facilitated by numerous success stories about traders who have earned thousands of “x’s” on the growth of some altcoin, or investors who have invested a couple of thousand dollars in a new project and received hundreds of thousands of profits in just six months or a year. These stories may be true, but they do not say a word about those millions of investors who simultaneously made the wrong bet and instead of profit received a colossal loss. The ‘big wins’ that we read about in the news are rare even among professional investors. For beginners, this is somewhat of an elusive goal. Newcomers should be understood not only as those who have never traded assets on the stock exchange before, but also as those who previously invested in traditional assets, but have no experience in the crypto market, which has its own idiosyncrasies.
When drawing up a strategy, it is necessary to get rid of excessive ambitions and hat-making plans. A small but stable increase in the value of an investment portfolio is better than an outsider opportunity to hit the jackpot with the risk of losing all investments.
Mistake #3: Incorrectly selecting the size of a position
The amount of benefit received directly depends on the size of the investment. And this, sometimes, plays a cruel joke on investors: in the expectation of high returns, they place their bets too high. Greed is a good motivator, but a bad adviser. It does not allow critical analysis to sensibly assess the prospects of a particular investment or trading position.
The reverse situation is possible when bets are placed too small, which, even if successful, are unlikely to significantly change the value of the portfolio or the size of the trading account. Fear, like greed, is also a bad adviser.
The task of the bidder is to determine the optimal position size (usually from 1% to 5% of the value of the trading account). Taking into account factors such as trading activity will also help to determine the position size more accurately. If a trader devotes little time to trading, for example, entering the exchange once a day or a couple of times a week, then the transaction size should be made at the upper limit of the aforementioned level. If a trader actively trades on the stock exchange and conducts a lot of transactions over the course of the day, then it makes sense to reduce the size of his positions to the lower limit of the aforementioned level.
Ultimately, when deciding on the size of a trade, a trader should understand that the amount he puts on a particular asset should be large enough to make a difference to his trading account, but also small enough to save the stress, in case catastrophic consequences arise from an incorrect forecast.
Mistake #4. A lack of self-control
The crypto market is extremely volatile, and one of the main reasons for such volatility is the high proportion of retail non-professional bidders, who are incredibly susceptible to the emotional buying and selling of assets. The crypto market is ruled by FOMO (the Fear Of Missing Out) and FUD (Fear, Uncertainty and Doubt), which means the slightest rumour can provoke an avalanche-like sale. The bidder must be able to work with information, conduct at least minimal fact-checking, due diligence on source reliability, and not succumb to knee-jerk desires. This will help those who otherwise might buy a coin at the peak of its value, or sell their dogs just a few days before they become stars.
Mistake #5: A lack of diversification
Bitcoin is the main and most reliable cryptocurrency on the market, which has proven its viability and relevance in the market despite numerous downturns, crypto winters and other shocks. But betting on one cryptocurrency is probably the most deplorable strategy that an investor can choose for himself. Of course, Bitcoin, as the most stable cryptocurrency, should occupy a forward position in any investment portfolio, but the existence of other digital assets, which, unlike Bitcoin, are more likely to show high returns, shouldn’t be ignored.
Properly diversifying investments in crypto assets is a non-trivial task, the solution of which directly depends on the investor’s ability to competently draw up a strategy, study each asset in detail in addition to its prospects and risks, while adequately assessing their own risk tolerance and horizons. The further the planning horizon is and the lower the risk tolerance, the more weight Bitcoin should have in an investment portfolio. If an investor is willing to take risks for the opportunity to see a significant return in six months or a year, the more attention he should pay to altcoins, without succumbing to overly optimistic moods at the same time. The ‘golden mean’ is considered to be an investment portfolio, half consisting of bitcoin, about 20% in ETH and the remaining 30% distributed among other promising coins, the share of each never exceeding 5%. This alignment of forces allows you to evenly distribute risks and smooth out possible damage from a fall in the value of one of the assets due to the overall growth of other components in the portfolio.
Mistake #6. An ignorance of trading instruments
The crypto market is young, but it is already quite developed in terms of various trading instruments – DeFi, futures and options, staking contracts, margin trading and so on. Many of them are associated with increased risk, which scares would-be participants. But it is definitely not worth completely neglecting such tools. They allow you to maximize potential profitability. Indeed, with the proper diversification of such instruments, the effect of investments is always going to be brighter.
Trading exclusively with one cryptocurrency deprives the trader of huge opportunities to increase the value of their account. During periods of Bitcoin stagnation, for example, it’s still possible to get high returns due to speculative transactions in meme coins popular among crypto traders, or due to increased trading in coins not listed on the stock exchange, but rather contained in DeFi protocols and staking contracts.
Mistake #7. Cybersecurity Negligence
Cryptocurrencies have returned asset control to the hands of their owners. But, with this control came a great deal of responsibility. If users aren’t that concerned about keeping their seed codes secret or checking the recipient’s address before sending funds, then, alas, many people are negligent about cybersecurity issues on crypto exchanges. However, the problem is not only in the negligence of the users but in the security holes that dot the centralized trading platforms. Here and there, you’ll find precedents that expose problems in the protection of user assets. Among the latest high-profile cases is the theft of NFTs and Crypto from a MetaMask wallet via iCloud, where the data, it turns out, was backed up from the MetaMask mobile application without any encryption whatsoever.
It is vital for users to carefully study the security system of any chosen trading platform, diligently use simple methods such as 2-factor authentication, and, if possible, store large amounts away from active trading accounts on cold wallets. Here, I would like to clarify that while hardware wallets are slightly less vulnerable than centralized crypto exchanges, one can’t call them cold wallets. There are already enough precedents for hacking hardware wallets. You’ll find stories about malware, pre-installed resellers on hardware wallets, and vulnerabilities known to exist in official software, which periodically become known to us after these hacks take place.
Mistake #8. Impatience
The first steps in the crypto market will inevitably be associated with failures. It is impossible to gain experience without trading. Therefore, the trader should immediately tune in to the fact that at first, he is not going to see quick X’s. In some cases, losses are inevitable. Failures undermine confidence and the desire to move on. But as Winston Churchill once said, “success is moving from failure to failure without losing enthusiasm”. “Making mistakes is normal,” writes Alexander Elder, a well-known psychologist and author of “Come into My Trading Room”.
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