Common mistakes people new to crypto make
Over the past year there has been an explosion of interest in people new to the crypto space, many of whom make the same mistakes when first introduced to this new dazzling world promising to revolutionise everything:
Going all-in straight away into the first thing you read about
You read an article about this promising new technology which has seen people make 000's% gains in the last 12 months, a technology that is being called Web 3.0 that will be the backbone of the internet for the next two decades. You see the article list the mysterious sounding Project XYZ and decide there is no time to waste, you simply have to immediately buy into this - whatever it is because you're still kind of fuzzy on the details. You buy coin XYZ and settle back to do some more research on your undoubtedly fantastic investment, only to subsequently realise that:
- XYZ is actually nearly universally derided across the internet or;
- It's actually got a lot of positive buzz but the price is falling fast anyway or;
- There's this other project that sounds even better
One of the major rules everyone in this space should always adhere to is not rushing when making investment decisions. Take your time to research the space, understand the technology, look at historic price movements. Don't get hung up on just one project immediately and seek to understand all the potential concerns about the project rather than just seeing all the positives. The project will still be there tomorrow.
The other reason not to go all-in straight away is that if you buy at a peak, you will have no fresh fiat to use for any dip. During the bull run of earlier this year Dollar-Cost Averaging (DCA), or buying a fixed amount on a regular schedule, would have been a bad idea given the rapid appreciation of the market. However, DCA can be a useful principle for many people, providing steady accumulation and smoothing out a highly volatile market.
Trying to be too active
It is one thing to be told that crypto is highly volatile but it is another to experience your first crash or sustained bear market. Unlike the more conventional financial markets, a daily swing of 10% is common, seeing your stack halve in fiat value in a week can happen quite regularly and drops of 75%+ are to be expected, particularly for the more speculative projects (and it goes without saying that the whole space is speculative).
The natural tendency of many people who experience this for the first time is to panic and try and make moves to salvage the savings they have pumped into this venture. They sell at the bottom, or they sell to try and buy back in lower but then see the price move against them; they panic at this uptick and buy back in, only to immediately see the market move downwards again - but now with a diminished stack.
Crypto is volatile. If you can't handle this then it is probably not the investment for you. There will be some situations where it is correct to sell (Mt Gox, Dao hack etc) because it is clear that the fundamentals of the space have changed and market sentiment is clearly going to be negative for a significant amount of time. However, there are also many times in crypto where it is just a natural drop, often following price run ups - no-one ever worries about volatility when they're seeing double digit gains on a daily basis.
- You probably aren't special. You probably aren't a gifted trader. You probably do not understand why the market is doing what it does
- You are operating in a highly manipulated and dangerous market. Don't conclude that because there aren't highly paid institutional quant teams operating trading in the space that this is a market ripe for suckers - you likely are the sucker
- You don't have to always be doing something. Sometimes it is ok just to let the market cycle bear out. If everything is tanking then it is likely nothing to do with just the project(s) you are in.
In downward trends (such as the one we have been seeing the past couple weeks with altcoins) it can be a prime opportunity to buy in using fresh fiat and add to your stack for the almost inevitable uptick.
To be clear, I am not saying that trading is bad as it is clearly very profitable for some people. However, especially for those new to the place, it is a very quick way to lose a lot of money. Just because you can doesn't mean you need to trade - when projects are capable of regularly returning 500-1000%, trying to make 10-20% on a trade can be counter productive.
Listen to the noise
The various message boards, social media and websites discussing crypto currencies are a fantastic source of news and opinions but ultimately there is so much competing information overflowing about the space that you have to learn to filter out much of it. Learn to recognise what is objective information, always question claims people make (particularly when it comes to pricing, when people will almost always claim a 10-100x return is not just possible but guaranteed by next year) and ultimately rely on your opinions on the project - read the white paper, join the team's Telegram or Slack groups, compile a list of pro's and con's about the project. You can often get a good feeling for the project through doing this. Don't take people's words as gospel and learn to rely on your own intuition as your knowledge of the space increases.