Cryptocurrency is about to hit mainstream awareness in an unprecedented way. Previously the domain of the tech elite, cryptocurrencies like Bitcoin, Ethereum and Litecoin have seen geometric growth over the last two years, and average people are starting to the massive potential of cryptocurrencies as growth investments. Thousands of percent or more growth in a period of months can be more than enticing to investors used to expecting 5-10% annual growth in traditional stocks.
For that reason, investors are beginning to rush into the crypto markets hoping to make a quick buck—without an understanding of either what these technologies actually are or how crypto markets work. People used to trading traditional stocks and bonds are quickly shocked to discover how little the 24/7, global, intensely volatile, unpredictable and unregulated crypto space has in common with the comparatively prosaic markets they're used to.
The next five to ten years are likely going to make a lot of people very rich in the crypto markets; however, the markets also hold the potential to burn the unwary who are following their greed and FOMO (fear of missing out) instead of taking the time to learn what they're doing.
To help out with the basics, I've listed the 7 biggest mistakes people make when investing in cryptocurrency.
1. Thinking too short term—rushing in and out too fast
The biggest and most tragic mistake that new investors make is rushing in while the markets are surging, and then panicking during the inevitable correction.
For a good example, let's analyze a specific slice of recent history that's far enough back (in crypto time!) to look at rationally: What happened with ETH (Ethereum) between May and June of 2017. The Ethereum technology, which has long carried extreme promise but had laid more or less dormant for several months due to early problems with hacks and network management, suddenly skyrocketed in value from around $90 to around $400, due in part to a large number of ICOs (Initial Coin Offerings) coming to market that required Ethereum to buy tokens.
Because of this spike, Ethereum entered mass awareness in a real way for the first time, appearing on CNBC and all over investment Web sites. Of course, people started rushing in to catch the wave.
Inevitably, as we see above, ETH corrected back down to around $150, and panic and terror set in as new investors saw 50% or more of their investment disappear in a flash. In the traditional markets, this would be a dramatic event. In the crypto markets, however, this kind of thing is standard—and so are equally rapid recoveries.
Of course, ETH has made a nice recovery since, surging to new highs. Unfortunately, many investors who rushed in during the May-June surge also panic sold, and lost their money permanently.
If they'd held on, they would have been fine.
2. Not understanding the technology itself
This is inevitable with the speculator rush described above. Investors are pouncing on cryptocurrency for one reason: Greed. Seeing the massive gains possible, they sink money into crypto simply in the hopes of making a quick buck. Yet they haven't even done their technical analysis, let alone their fundamental analysis.
Simply put, blockchain technology holds the potential to completely change not just financial transactions, but legal contracts, governance and even the nature of the Internet itself—and lots more.
That's because blockchain isn't just "digital money." It's a way of conducting secure transactions without a middleman—in the case of Bitcoin, that means no bank; for Ethereum, that means smart contracts and the possibility of making legal and even political agreements without a third party. Ethereum and newer technologies like Golem are also holding out the promise of running the entire Internet in a decentralized form and sharing computing power across the entire network—that is, turning every computer on the Internet into one gigantic supercomputer.
What that means is that we're looking at an invention more important than the credit card and potentially along the lines of the discovery of electricity. And what that really means for you is that you must pay long-term attention to blockchain technology if you want to stay on top of your finances and ahead of the curve of the market. Consider how you would have done if you'd paid close attention to a few little companies called Facebook, Google and Amazon when they were first starting out.
Check out the video below for a quick introduction to blockchain tech. (There's also a very good write-up intro to blockchain here.)
3. Trying to trade
Day trading crypto is a fairly unwise thing to do for new investors—or even seasoned investors. Crypto is phenomenally volatile, does not follow traditional market logic, and trades 24/7. That means that you're likely to get chopped up fairly quickly if you try to time the market or trade. And by the way, nothing is worth the havoc wreaked on your sleep, your personal relationships and your sanity by sitting at the computer all day and all night in a panic, afraid to go to sleep, only to crash in the dreadful knowledge that investors on the other side of the world are about to wake up and rock the entire market one way or another while you snooze.
It's not worth it. Make wise investments and hold them long term.
4. Putting all their eggs in one basket
With the crypto speculation rush, we've been seeing insane stories about people borrowing gigantic amounts of money to invest, dipping into their retirement savings or even taking out a second mortgage on their house to buy ETH.
Don't do that. Sure, it might pay off, but do you really want to live in a world where it doesn't? (And do you want to live with the stress of knowing you're all-in?) That's not investing, it's gambling.
The number one rule of crypto trading is this: Don't invest what you're not willing to lose. Keep to that rule, and you'll sleep well at night.
The same goes for thinking that buying multiple cryptocurrencies means you're diversified. You're not—their prices are all more or less tied to each other, with the price of Bitcoin leading the pack.
5. Falling for questionable ICOs and pump-and-dumps
As the crypto gold rush heats up, tons of people have figured out that the best way to make a quick buck is by creating new cryptocurrencies based on questionable premises and quickly bringing them to market.
These coins surge in value in their opening moments, often to absurd proportions, only to crash to nothing in a matter of seconds and never recover. This is called a pump-and-dump. The only ones smiling are usually the ones who designed the pump-and-dump in the first place, usually by spamming crypto forums like /r/cryptotrader and 4chan's /biz/ forum with hype posts about how their coin is going to be the next big thing, which many newbie traders actually fall for.
Here's a good example of a pump-and-dump. You should be able to see for yourself why you don't want to be on the wrong end of it:
6. Not securing their crypto
While security has come a long way since the days of the Mt. Gox disaster, exchanges and even wallets (like the popular Jaxx wallet) still get hacked.
For that reason, you want to store your crypto locally, and preferably in cold storage—that is, in a physical device that only you have access to.
7. Not taking any risks at all!
For all the risks with crypto, not being in the game could be the GREATEST risk of all.
Cryptocurrency and blockchain technology is poised to see explosive growth over the coming years. Now, we don't know anything for certain—but it's possible that those who doesn't invest now will be kicking themselves in the future.
Get wise, get educated, get a plan—and most of all, get involved!!