9 common mistakes when investing your crypto

9 common mistakes when investing your crypto

Share this article

Mike
Mike

An editor at Coincrop


24 Dec 2021 | 20 min read
34,346 views

I

nvesting in the world of crypto can be fraught with challengers.  Unlike the traditional world of finance, there are no financial advisors that are qualified in crypto currencies to which you can go for advice.  So that means it’s down to you to do the research.

Below we look at ten of the most common mistakes made by individuals.

In this guide:

Disclaimer: All of the information written on Coin Crop is without influence and based on our analysis. No guarantee is offered concerning the accuracy of this information and therefore, any individual following up on it does as such completely at their own risk. Rates are correct at time of publication.

Mistake 1: Not having a plan

The plethora of ways by which you can acquire crypto currencies leads many individuals to blindly stumble into the asset class with little in the way of a plan.  As the age old saying goes “Failing to plan is planning to fail”.  Before embarking on crypto currencies as an investment, we suggest considering the following:

i) Consider your current financial situation

Start by asking yourself how much money you have to invest.  A good way is to make a budget looking at your monthly disposable income and deducting monthly outgoings – remember to consider some emergency savings.  You might also want to consider how accessible (or liquid) you require your investments to be.   For instance, if you might need funds at short notice, you won’t want to lock away your crypto with a fixed duration savings product.

ii) Define your financial goals

Your financial goals are the reasons as to why you are investing.  What is it you are hoping to earn the money for? Maybe you want to buy a new car or a luxurious holiday? Maybe you are thinking further ahead and are planning for a retirement?  You should also ask yourself what your timeline is for making the investments.

Financial goals can be considered as three categories: income, safety and growth.  Income is when you want active income to live off, safety is looking to keep your current level of wealth and growth is generating wealth over a longer time line.

iii) Establish your time horizon and risk tolerance

The time horizon refers to when you want to start taking money from your investments in order to achieve your goals. So how much risk are you willing to take? This question is especially relevant in the world of crypto currencies.  Broadly speaking, the younger you are means you can have a greater risk appetite (since you have time to recover from any loses) whereas older individuals should look for less risky investments.

iv) Deciding where to make your investments

As a starting your point, you will need decide which crypto assets to purchase - at the time of writing, there are over 6,500 crypto currencies.  Once of you have decided which assets to acquire, you will then need to decide where to invest.   This web site provides significant resources around saving, staking and yield farming opportunities.

v) Monitoring and modifying your investments

Once you have acquired your crypto currencies and placed them in an investment vehicle, it can be tempting to just sit back and check-in again in twelve months time.  This is not a good idea!  The crypto industry is evolving at a rapid pace and it is essential to carefully monitor your investments.  It may be necessary to move your assets to other investment vehicles in the event that initially high rates decrease.

Mistake 2: Not researching before you choose the cryptos to invest

A commonly heard saying in the crypto world is “do your own research” – DYOR and we cannot emphasize the importance of this point enough.

The practise of shilling is common in cryptocurrency where individuals promote the positivities of a particular asset they they own in the hope of affecting the price upwards. Frequently, it can be difficult to distinguish between an unbiased post or a shill.

In terms of where you should “do your own research”, we recommend taking a broad interest in the market.  Below are some ideas:

    • Participate in Twitter.  The micro blogging platform is a great start for following influential figures.

    • Subscribe to Medium. There are a wealth of crypto resources and opinions.

    • Coin Metrics provides market data, indexes, network data and crypto financial intelligence.

    • LunarCrush has emerged as a reliable social media provider in the crypto community. The platform aggregates news from a variety of sources together with significant statistical resources.

    • Avoid Telegram groups that seek to pump low market capitalisation / high volatility asset.     

    • Messari aggregates crypto data from a variety of sources and has built a reputation for unbiased news.

    • Glassnode provides on-chain data and market intelligence offering metrics and insights. One particular aspect of Glassnode is in very useful is the analysis of exchange inflow and outflow for different assets.

    • Santiment shares some similarities with Glassnode and can be a useful crypto research tool.

Mistake 3: Not staking your coins

It’s always surprising to learn of crypto currency investors that have invested significant sums in such assets yet have no idea that they could be getting good returns on those assets by staking.

Below are some examples of staking rates:

AssetTermsAPY Rate

Osmosis (OSMO)

Fixed (7 days)

90.0%

Osmosis (OSMO)

Flexible

89.3%

Axie Infinity (AXS)

Fixed (60 days)

61.6%

Axie Infinity (AXS)

Fixed (30 days)

57.2%

Neo (NEO)

Fixed (7 days)

45.0%

PancakeSwap (CAKE)

Fixed (60 days)

44.5%

PancakeSwap (CAKE)

Fixed (30 days)

41.3%

Synthetix (SNX)

Flexible

37.8%

Ethereum Classic (ETC)

Flexible

37.1%

Audius (AUDIO)

Flexible

36.0%

Mistake 4: Investing with dubious providers

At the time of writing this guide, there are over 100 organizations in the crypto sphere that offer one of saving, staking or yield farming opportunities.  The reputation of these organizations varies tremendously from the yield farms that are run by one guy in his spare bedroom to the tier one companies with significant capital and resources.

When deciding which company should be entrusted with your investments, we suggest considering some of the following?

    • Is the organisation a registered legal entity that can be identified?

    • What is the country in the which the organisations legal entity registered?

    • Are the key individuals of the companies leadership team identifiable?     

    • How old is the company?

    • Is the company registered with any regulatory bodies?

    • What kind of social media presence does the company have?

    • How much money is currently invested with the company?      

    • Have there been any past operational incidents with regard to this company?      

    • Does the company have a full cross-platform offering? E.g. web, Android, iOS etc.?

    • Does the company have a Trust Pilot or Google rating?

    • Does the company participate in the crypto community?

Below are several organizations that offer crypto savings products that we have rated:

OrganizationProductsWebsiteRating
Crypto.com127https://crypto.com
Coinbase6https://coinbase.com
NEM0https://nem.io
Nebeus8https://nebeus.com
Bitwala0https://bitwala.com
Liquid14https://liquid.com

Mistake 5: Poor portfolio diversification

A healthy portfolio allocation is a mixture of investments so as not to rely on just one asset class.  This diversification increases the chances of your portfolio performance regardless of events in the world.

Historically, the thinking for a traditional portfolio was a 60/40 split:

    • 40% bonds from banks, companies or governments

    • 60% stocks and shares

However, in more recent years the pitifully low rates of interest on bonds and savings accounts has led many individuals to shift further into stocks and shares.   Additionally, the consequences from high rates of inflation shifted investments into:

    • Property

    • Commodities

    • Precious metals (silver and gold)

It would be an irresponsible financial advisor that ever recommended investing all of your liquid assets into crypto currency so whilst we are very enthusiastic in this class of assets, it still makes sense to diversify in different asset classes.

Mistake 6: Sending coins to the wrong address

Once you have acquired your crypto currency and chosen an investment vehicle, it is likely that you will need to transfer the asset.  For example, you may have purchased Ethereum on Coinbase but wish to invest the asset on Hodlnaut.  You will be given an address to which you must transfer the asset – the address will look something like:

0x477573f212a7bdd5f7c12889bd1ad0aa44fb82aa

There is significant scope for mistakenly entering this address thus it is always recommended to use the copy and paste function on the mobile phone or computer on which you are performing the transfer.

A good practise is to initially send a small amount of your crypto currency to confirm that it actually arrives.  This would incur a fee but is worth the peace of mind for knowing that you are sending the asset correctly.

If you are performing transfers using a mobile phone and a computer, it may be helpful to use a QR code. For instance, assuming you were sending Ethereum from the Coinbase mobile application, the Hodlnaut web site running on your computer could present a QR code which you would scan using the Coinbase application.  This has the benefit of not requiring you to manually enter an address.

Did you know that in addition to the over 6,500 crypto currencies in the world there are also a number of blockchains.   At a basic level, the blockchain could be thought of as a road over which a particular crypto currency travels (i.e. when sending from one address to another).  Sending a crypto currency to an address on a different blockchain could result in funds being lost.

Mistake 7: Failing to secure your investments

Having safely transferred your hard earned investments to carefully chosen investment vehicles, consideration should also be given to keeping them secure from fraudsters.

    • Ensure that passwords used are always unique and never reused.  Otherwise, in the event of one organization being compromised, your credentials can potentially be reused elsewhere.      

    • Use a password tool to record your various passwords.  The password tool is typically secured with a master password.

    • Always use strong password that combine a mixture of upper case and lower case characters, numbers and symbols.

    • Use two-factor authentication (2FA) to secure your accounts.  Tools such as the Google Authenticator application generate time limited codes that are requested at login.  Avoid using SMS as this method is less secure with the risk of a fraudster porting your number to another carrier.

    • Avoid side loading applications on Android.  These are applications that exist outside of the Play store and are often riddled with malware that can have the capability of stealing credentials.

    • Take care against phishing attacks – use antivirus software – take care with attachments from unknown recipients 

    • Consider how your crypto currency investments would be accessed in the event of your death.  Do your family know where the assets have been located? Do they have access to the relevant credentials to access the assets?

Mistake 8: Investing more than you can afford to lose

It’s no doubt rather obvious to make the point but you should only ever invest what you can afford to lose.  Crypto currencies are notoriously volatile – huge gains can easily me matched by huge losses.

You may consider that the more established such as Bitcoin or Ethereum are immune from such dips.   This is certainly not the case – back in late 2017, Bitcoin reached almost $20,000 before dropping back to $3,200 a year later.

The amount that you do choose to invest will be very dependent on your personal circumstances and appetite for risk – just keep in mind the potential worst-case scenario.

Mistake 9: Not taking profits

Judging when to take profit is a key skill in the crypto currency sphere.  It may be that you have set out with a plan that delivers a regular income from your investments but along the way the asset has appreciated unexpectedly in a significant manner – it’s not unknown for 40-50% spikes in a 24-hour period.

 


Mike

Mike

An editor at Coincrop
View articles


Our sponsor

CoinLoan combine the best of traditional and novel finance helping you borrow, swap and grow your assets.

Compare over 40,509 CeFi and DeFi products across more than 207 organizations here