In the past, we have covered quite extensively on how to invest into ICOs and whether or not to invest in cryptocurrency at all. In this piece, we want to touch more on the common mistakes befalling crypto investors, when building a portfolio comprising of cryptocurrencies. These are the common pitfalls:
Not doing research
For new investors, there’s no shortage information sources – blogs, Youtube videos, even Reddit posts that claim to know what the next big thing in cryptocurrency will be. Unfortunately, many of these people (known as “shills”) are often not very honest, or have little access to the inner workings of the crypto projects. Mostly, don’t take them too seriously as they are more likely to be paid to shill certain “coins” and projects. That’s why it’s important to do your own research on any cryptocurrencies you are considering. Make sure to read the whitepaper, understand their use cases for and find out more about the team behind the project. Remember, the team IS the most important.
Putting all the eggs into one basket
This basic fallacy is actually quite common. If you only have a small amount of money to invest it can be tempting to put it all into one project. This is unfortunately a bad move, because it’s easy to make a bad call and lose a substantial amount (if not all) of your investment. A better idea would be to spread your investment across a few different projects which you understand to have good projects and worthy team behind them. Bear in mind, that the act of diversification works well upon the basic assumption that all cryptocurrencies move up sometime or the other – together. The only risk is therefore project risk; where the project runs out of money before the price of the token goes up.
Ignoring the circulating and maximum supply of an asset
Cheap tokens often get the most attention from amateur investors – thinking that if they buy it low, they can sell it high. Unfortunately, many of them fail to take the supply of the tokens into consideration. The token count impacts greatly the valuation of the project, which in turns determines the price per token. A token with a huge circulation will have a hard time appreciating in value thanks to the constant downward selling pressure.
Investing only in projects with low market capitalisation
It can be very tempting to invest only in tokens with a small market capitalisation. While these projects often have the greatest potential for appreciation, they also carry a huge inherent risk. If too much of your money is locked into these tokens then you could be in for a bad time. You see, low market capitalisation projects are often created by the project developers’ own doing – either their project hasn’t had much traction, or they haven’t generated enough interest from the community. Either way, it is an uphill battle – and if you hope to profit from such projects, it’s usually a dime in a dozen.
Panic selling or buying
Many investors who have ignored the cardinal rule when it comes to trading cryptocurrencies. Entry and exit prices are very important as it determines profit or loss. Often, rushing into a token because its price has taken off is a bad idea, and selling too soon when the market drops or gains in your favour reduces your chances of success.
While it may take time to master, it is most important to first adhere to the learnings between Points 1 and 4. Once you can be sure to have taken learnings from those points, can you start perfecting your buying and selling strategies.
Tales of catching the falling knife are not uncommon in this industry. Proper due diligence is encouraged, and perhaps it might be a good idea to stick to popular tokens that have been around for some time – Bitcoin, Bitcoin Cash, Litecoin, Ethereum, Monero etc. That is until one has mastered the art of avoiding the 5 pitfalls mentioned above. Remember – the promise of wealth is great, but the fear of loss is greater. However, do note that we’re not investment advisors.
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