It can be easy to make “newbie” mistakes when trading crypto-assets. Crypto is a high-risk asset class in an extremely fast and rapidly growing market. The market moves so quickly that any mistakes can result in exponential losses if you aren’t careful.
Making mistakes is all part of learning, however, and if you want to advance as a trader you will need to learn to navigate around these pitfalls to avoid potential losses. With every new altcoin entering the market comes a herd of new traders, and many of them don’t have sufficient knowledge to make informed decisions.
This means you need to get ahead of the competition, and you can do so by firstly learning the solutions to remedy the most common mistakes made by new traders. These range from mistakes made with basic security practices to developing and adhering to a clearly defined trading strategy. Diving in, let’s get started:
The most basic of mistakes new traders can make relates largely to the security risks you would typically associate with any internet / online activity. You need to exercise caution with nearly everything you do online nowadays: from checking your bank account on a secure connection, to making online purchases with reputable companies, and being careful what emails and files you open on your devices. This also applies to trading or investing in cryptocurrencies.
When trading and storing your crypto-assets, there are some easily avoided mistakes every new trader should already know about but that likewise bear repeating. The most simple of these involves practicing safe browsing habits. You don’t need to run high-end or expensive anti-virus programs on your devices if you are cautious and vigilant when online.
Falling victim to hacking, malware, or password-stealing viruses and Trojans can jeopardize your crypto-holdings, wallets, and personal accounts.
Always double-check urls to make sure they are secure and that you are not visiting a “phishing” site trying to scam you out of your personal information. Likewise, beware of clicking suspicious links or executing programs from unverified sources that may contain malicious malware or spyware.
It is also highly recommended that you set up 2-factor authentication with your online exchange wallets. Wallets provided by exchanges (also known as “hot” wallets) can be hacked even if your devices are secure and you practice caution online. This is why it’s absolutely essential that you be aware of any activity on your exchange-accounts, especially if you are holding a substantial amount of coins to trade at the opportune time.
Finally, and perhaps most importantly, use a hardware wallet to store your funds offline when not actively trading. This is the simplest and safest way to safeguard your crypto-assets from would-be attackers and hacking attempts.
If you haven’t already checked out the Intelligent Trading Crypto 101 post on "Safely and Securely Storing your Crypto Assets", have a read to learn more about the different types of wallets, their security features, and the top options available.
Another basic mistake traders can make is sending their coins to the wrong address or wallet, and while this is easy to avoid, you should always be aware of the risk. Use the clipboard to copy and paste addresses every time when sending currency on a PC, and make sure to double-check the address on the receiving wallet before executing and confirming any transactions.
Sending coins to the wrong address does not always result in your funds being lost, although this can happen in certain circumstances. Addresses on a blockchain are long strings of alphanumeric code, and often have a "checksum" built in to detect errors in data and prevent unintended transactions. With Bitcoin for instance, addresses include Base58Check encoding and a checksum to determine their validity. Ethereum does not include a checksum in their code, but wallet providers and exchanges are required to provide their own checks for ETH transactions.
The checksum ensures that even with addresses of varying length, the blockchain can detect an incorrect (or mistyped) address, reject any subsequent transactions, and then refund the user for the funds sent. Keep in mind, however, that if your typo results in a mathematically-valid address, your transaction will be permanent and irreversible and will very likely lead to you losing your cryptocurrency.
Checksums across blockchains and exchanges are also in place to prevent you sending one type of cryptocurrency to a wallet that does not support your asset. For example, if you send bitcoin to an ether wallet address, or to most other blockchains, the transaction will usually be rejected and your currency refunded. This will be true in most cases involving simple typos made when sending major cryptocurrencies as well, but be warned that every cryptocurrency does not have these checksums in place and some can be easier to send to a wrong address or wallet than others.
One final concern comes from hard forks in a blockchain and the support for forked currencies on exchanges. It is possible to send a crypto-asset to a wallet that does not support that specific cryptocurrency, resulting in you being unable to access or recover your funds. This can happen when you do not control the private keys to your wallet, like on exchanges.
Take the Bitcoin hard fork for instance, which resulted in the split between Bitcoin (BTC) and Bitcoin Cash (BCH). If you mistakenly send BCH to your own BTC address that you personally control (and have the private key for), you won’t have any problems recovering your funds.
But, and this is important, if you send that BCH to a BTC address on an exchange, there’s a high chance you will never see those funds again. If you control the wallet, you can potentially use a platform like ShapeShift to convert one currency for another that is compatible with that wallet, and then retrieve your funds. In some cases, however, your funds could be locked away until the exchange rolls out support for that specific cryptocurrency.
Modern Portfolio Theory (MPT) in its simplest terms relates to “not putting all your eggs into one basket.” Rather, what MPT suggests for portfolio management is that you keep a “basket of assets” to limit exposure to any one asset, reduce risks, hedge losses, and optimize returns.
This has been seen in mutual funds for decades, and the same concept applies for trading crypto-assets and managing your crypto portfolio, whether you’re short-term trading or long-term holding.
It’s important that you diversify your portfolio and rebalance your asset allocation at consistent intervals.
By doing this, you can better manage your risk-reward and ensure your results remain in line with your hopes and expectations.
Crypto is a high-risk asset class, so spread your trades out.
Don’t put all your money into one trade or coin trying to win big; instead keep at least a percentage in bitcoin to have and enter trades with.
Regularly rebalance your portfolio, have a distribution strategy, and rebalance if skewed according to your strategy.
There are many strategies for maintaining the optimal crypto portfolio you should consider, from the more conservative to riskier trading. Some of these worth looking into include:
Pay attention to market capitalization, not market price. Many new traders focus exclusively on the price of a coin. When they see a “penny coin” or anything under $1, they imagine the exponential gains they can see with the amount of coins they can potentially buy. Don’t be one of these traders. You don’t want to buy coins based on their price alone, as the chances are that you’ll regret it.
Instead, rather than judging by price, it’s absolutely essential that you DYOR (do your own research) before entering the market with a coin. Don’t follow online “influencers” blindly. Evaluate coins based on principles of fundamental analysis (FA). If you can, apply some technical analysis (TA) into your evaluation, but if you can’t, return to the fundamentals.
Take into account the amount of coins circulating in the market. Look for a really strong team, examine their whitepaper, and overall look to see if the project or coin you’re interested in has a solid foundation to build on. You want a coin with a strong technology behind it, a promising future, and a low market cap.
Fear of missing out can make you feel like everybody else is riding the waves, but you’re watching from the dock and you want to join the party. In trading, it feels like this is the ONE trade that will make you a fortune and there will NEVER be another opportunity like this.
This type of thinking affects many traders, and many of them may not even be aware of it. Following “trending” coins and oversizing your position is a dangerous practice that new traders need to firstly be aware of, and secondly need to try to shake off at every turn.
Don’t “chase” the trade. You don’t want to buy a coin at its all-time high or as it’s skyrocketing. Oftentimes traders will notice a coin rising sharply in value after it’s too late, and while fear of missing out or other factors might make it seem like a good time to buy-in, this can be a costly mistake.
You’re better off waiting until that coin reaches its all-time high and then corrects itself or drops in price some. While it can be difficult to predict the top or the bottom, it should not be too difficult to spot when a coin is sharply rising and avoid buying it for the time being. Just be patient, watch the coin, and wait for a better and less risky time to buy.
The market is always right. Period.
If the market does not act how you predicted it would, the simple truth of the matter is that you are wrong. A common mistake made by inexperienced traders is holding onto their investments long-term after a big price movement, hoping that one day soon the price will go back up.
However, it’s absolutely essential you observe the overall trend before deciding on rational entry and exit points. If you plan on trading, define a clear strategy and get out of the habit of holding investments over long periods of time, even if you believe in the asset class.
Do not consistently go against the trend. Look for it. Be aware of it. And either get out or get in depending on the current state of the market.
You don’t profit until you have cashed out. When you’re satisfied with a coins performance, consider locking those profits in.
Either take the cash or redistribute your profits into different coins to improve your gains across your overall portfolio.
When a coin begins rapidly rising in price, it’s human nature to get greedy. You may start dreaming of that lamborghini and mountains of cash coming your way, but you need to be prudent and exercise caution here.
Lock some of those profits in, either cash out or redistribute your gains into other coins. If a coin rises rapidly and sharply in price, just know that the coin can drop just as quickly. If you held it all the way and then all the way back down, you don’t get any benefit from your investment.
You don’t need to sell all of it at once, but definitely consider selling small percentages at designated intervals of time or performance so you make the most of the opportunity.
As the saying goes: “you’re not at a loss until you sell.” It can be against human nature to accept a loss, but it might be smarter in some cases to sell and redirect your funds into another coin that will help you recoup your losses quicker.
If fundamentals change or the market sours on a particular coin, you might find yourself with large losses and not want to sell. In this situation, you need to fight the biases to be stubborn and hold until a recovery takes place. In some cases, that recovery could be months or even years in the making, or never come at all.
You need to understand that in a market as irrational and repeatedly manipulated as crypto-assets, there is no system that can accurately and consistently predict market behavior. The goal of every trader is to be right at least 51% of the time. Along this line, you also need a certain level of frustration tolerance for losing money in 49 out of 100 trades.
There’s also the “80-20” rule of trading. Successful traders make their money with 20% of their trades. The rest are either taken at a tie or a loss. When a good trade brings you 15% profit, then a bad trade should only bring 3-4% loss on average.
Mastering this is not easy, but it’s all part of risk management and how you win the game when it comes to trading.
The crypto markets are plagued by “pump and dump” schemes. These occur when a collective of traders decide to buy into an obscure coin, push (pump) its price up, and then all sell (dump) for profits.
Fear of missing out might beg the question, “but what if the price keeps going up?”
Don’t fall into the trap. Instead, do your own research and investigate what’s really happening. When a “penny coin” suddenly sees a sharp rise in volume and price seemingly without reason, be skeptical.
Go to the coin’s price chart and observe its history; resistance and support lines do not lie. You can also use websites like CoinCheckup, which provides up-to-the-minute data on coins that cross certain thresholds to identify these pump and dump schemes.
What goes down does not necessarily come back up again.
Another mistake amateur investors can make is searching for and banking on crashed coins.
Don’t assume that a coin being lower than its peak price is an opportunity. There are many coins that have slowly disappeared and fallen out of continuous trading, and this is a scenario definitely worth consideration with any coin you want to put your money on.
If you’re looking into low market cap coins that also have low volume, you need to investigate. Observe the coin’s history and identify its peaks and when those peaks were reached. If the coin has been on a steady decline for a longer term with very little price correction, don’t jump onto the sinking ship.
Your natural inclination in trading will be to find the next new altcoin with considerable potential for growth and a low buy-in point. You want to invest heavily when it’s still inexpensive to do so, and later collect profits as the coin matures in value. However, with so many altcoins entering the market at rapid pace, many of the new crypto-assets may not make good long-term investments.
Be cautious with new altcoins on the market. While you may be looking to find the next gold mine, being skeptical of new coins can help you avoid getting scammed.
Pump and dump schemes tend to target newer, lesser-known coins—something far too common in the crypto world—and getting caught up in one can be a costly mistake.
You will also want to beware proprietary altcoins only available on closed systems. These coins are usually pre-mined by the company offering them, and are only tradeable on the company’s closed system. Due to this, these coins are extremely susceptible to internal price manipulation. Be extremely cautious if you find yourself considering coins like these.
To be a successful trader, you must not only acknowledge your mistakes but more importantly analyze and learn from them. You should always be improving your skills and furthering your understanding of the market and of yourself.
Beware of your emotions. Don’t let fear of missing out lead you to oversizing your position; or fear, uncertainty, and doubt drive you to panic-selling. While this is much more of an art than a science, it takes practice and constant attention to your own market behavior. Develop a strategy and follow it.
Don’t put all your money into one project or coin. Spread your trades out and diversify your holdings. And when starting out, remember to start slow. This is critical to your long-term success as a trader. The first goal in trading is survival, so learn how to make good trades before putting a lot of money into the crypto market.
Always do your own research, and don’t be easily influenced by anybody on the internet. Go back to basics: examine the fundamentals behind a project, and analyze it technically if you can. Always try to avoid pump and dump schemes and scams, and try to make informed decisions rather than trusting your instincts.
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