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Top 5 Cryptocurrency Trading Mistakes Every Rookie Investor Should Avoid


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1. FOMO, Following the Herd and Buying High

This is the big one, and it’s one that far too many newbie traders make. This is unsurprisingly really, given how much the cryptocurrency market and sector is constituted by social media and the Web.

Put simply, far too many of us receive information about cryptocurrencies from (usually anonymous) accounts on the internet. On top of this, social media creates the potential for viral investment fads, as a mass of people rally behind a particular cryptocurrency, almost solely because others are doing the same.

An indication of just how much cryptocurrency is driven (mostly for the worse) by social media was provided by a survey published by the non-partisan NORC at the University of Chicago in July 2021. It found that 24% of cryptocurrency traders primarily receive their info regarding crypto from social media, with 26% informing themselves via crypto-exchanges and 25% from more general trading platforms such as Fidelity and Robinhood.

If nothing else, this survey underlines just how poorly informed many traders are. Relying on social media is a recipe for disaster, since posts spread through social media mostly because they reinforce what people already want to hear. Instead, traders really should endeavor to find more objective and impartial sources of information, and to conduct their own research via primary sources (e.g. company websites and white papers) and their own critical analysis.

Otherwise, traders can all-too easily fall into the trap of following whatever the largest number of people are talking about on Twitter, Discord, Telegram or whatever else. Almost needless to say, latching onto a cryptocurrency only after it has gone viral usually means that it has already reached a top. In other words, far too many people swayed by social media end up buying a cryptocurrency high, at which point it falls.

Another example of just how dangerously powerful social media is — if more proof were needed — can be found in the fact that around $770 million in losses from crypto-related social media scams were reported to the FTC in 2021. The takeaway: always step outside social media to pursue your own research.


2. Panic Selling

The flipside of FOMO (fear of missing out) and buying too high is panic selling. Admittedly, this is a harder error to avoid, if only because you may genuinely need to sell certain cryptocurrencies in certain circumstances, and differentiating (in a moment of fear) between a faddish token that’s actually in the process of dying and one that has a sustainable future ahead of it can be tricky.

One temptation many new traders have is to buy, say, $1,000 of a cryptocurrency, and then sell it quickly if it falls significantly lower, to something like $800 or under. Especially if you’re a risk-averse trader, you might be set on avoiding being significantly in the red at any moment whatsoever, and so would prefer to sell in order to limit losses.

However, this is really a good idea only if you’ve decided that the cryptocurrency you’ve invested in is never going to recover, and/or that you’re never going to buy it (or perhaps any other cryptocurrency) again. Conversely, if you could or do see yourself buying it again ‘when things pick up’ you’re setting yourself up to lose money. That’s because you’ll be replacing the same amount of cryptocurrency for less money (be it USD, EUR or GBP), and then using this same quantity (of less) money to buy what will likely be the same cryptocurrency at a higher price.

Instead, it again really pays to do your own research and pick a cryptocurrency you really believe in. And ‘really believing in’ a cryptocurrency means sticking with it even when it dips and falls, since you expect that, in the long term, it will have a higher price than what you paid for it.


3. Making Too Many Trades

Strictly speaking, this error is a combination of FOMO and panic selling. Basically, some new traders have an unfortunate tendency to swing impulsively from one trade to another, led once again by social media buzz. What this means in practice is that, holding one cryptocurrency, they sell it for another token in the hope of bigger gains, and then sell the second for a third one, and so on.

There’s never a guarantee that this approach will actually result in more profits for the trader. However, one thing it will guarantee is that they end up paying more exchange fees for each new transaction they make. And when you combine this with the possibility that they may exit one token at a loss, and exit another at yet another loss, you can easily imagine the kind of costs and losses that are compounded into one yellow snowball of failure.

Again, the trick for avoiding this is to set out from the very start with a clear idea of which are the fundamentally strongest cryptocurrencies, and stick with them. Do not keep jumping bandwagons, and remember that the cryptocurrency sector is still very young, so even coins that are modestly rising now may be much higher in several years (so long as they’re fundamentally strong).


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4. Keeping Holdings on Exchanges

This one isn’t a crypto trading mistake per se, yet it’s nonetheless one that many, many new traders make. Even though Bitcoin is well over ten years old and crypto-exchanges generate millions or billions in revenues each year, the latter are still hacked from time to time. Even Binance was hacked as recently as 2019, and with hacks costing around $4 billion in 2021, it’s never a good idea to keep significant sums of cryptocurrency on an exchange.

Of course, what counts as ‘significant’ varies from person to person, but a general rule of thumb is that, if you have more crypto on an exchange than you can afford to lose, then transfer it to your own hardware wallet. Even the best hardware wallets today are relatively inexpensive, but they provide a secure and simple way for you to take custody of your own cryptocurrencies. And given that they’re much more secure than pretty much all exchanges and DeFi platforms, they’ll protect traders from any unfortunate and unexpected losses.


5. Making An Investment All At Once

Unless you bought bitcoin in 2010, it’s usually not a great idea to buy a large lump sum of the cryptocurrency and leave it at that. Now that bitcoin is relatively expensive — and also subject to semi-regular price swings — a more prudent method is to use dollar-cost averaging.

So rather than, for instance, buying $10,000 in ETH right now, it’s usually a better bet to spread this purchase over the course of several months. By purchasing $1,000 or $2,000 of ETH at a time each month, you even out price fluctuations, balancing dips after purchases with rises. By contrast, with a single large purchase, you run the risk of buying too high and seeing an immediate drop afterwards.

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