With over 56 million registered users on Coinbase alone and bitcoin search results reaching all time highs on Google, it’s safe to say popularity has never been greater for this emerging digital asset class. Yet analysts are increasingly divided, with some calling crypto the future of money, while other traditional banking elites warn of an impending bubble. Nevertheless, the inflow of investments from institutional investors and corporations have helped in raising investors sentiments about bitcoin and other digital currencies.
Contrary to stocks, currencies and other assets, cryptocurrencies are speculative network effects and their price is directly correlated to adoption and market reports. For instance, the bitcoin price surged from $40,000 level early this year to an all-time high $70,000 mark after Elon Musk’s electric car maker Tesla declared the largest digital coin as a valid form of payment. However, the price pulled back below $40,000 from its all time high after Musk expressed concerns over bitcoin mining through nonrenewable energy sources.
Although market analysts have been finding reliable on-chain metrics to value crypto coins, it’s still not obvious whether making buy or sell calls based on technical factors is a good idea, which is mainly based on historical trends and patterns. Gauging future performance through fundamental factors is a popular approach. Whatever method investors adopt, the prospect for portfolio losses increases if one doesn’t follow basic guidelines.
Below are the five worst mistakes you should avoid as a crypto coin investor.
1. Low Price Doesn’t Mean its Cheap
Thousands of “meme” inspired coins have been circulating in retail markets and most of them have no acceptability or utility value. Investors are buying them merely with the pipe dream that one day it will turn into a million-dollar bet. For that, they chase meme-inspired coins that can be bought in volume. They Dogecoin, which once traded at a very low price and then saw a whopping growth – helping to make early adopters millionaires and billionaires. To be clear, a low price does not mean the coin is trading at discount. Indeed, it reflects its demand and actual worth.
In Dogecoin’s case, Elon Musk’s backing played a key role in strengthening its demand and pushing retail investors to play with meme coins. There are hundreds of other coins that are trading at a very low price, but eventually, these coins usually disappear because of low demand and volume, resulting in losses for investors who try to become early adopters.
2. Don’t Forget Your Risk Tolerance
Don’t invest what you don’t expect to lose. Investing is all about winning and losing. However, one can mitigate losses by astutely allocating investments along their level of tolerance to risk. Buying cryptocurrencies by pulling out your other investments could be an unwise move on many levels. Instead, sticking to your long-term investments while allocating a very small percentage of your portfolio to speculative assets seems like a prudent general strategy.
Breaking long-term investments would make it difficult for investors to meet their financial goals.
3. Buying on Speculation
Buying on speculation is the worst mistake many beginners make and this could often lead investors to buy high and sell low. Many newcomers just want to ride the rally and make profits without thinking about the future prospects of that coin or what factors are actually driving the coin’s price higher. Early this year, speculation about the massive level of crypto adoption as well as broader crypto market rally have pushed both retail and institutional investors to buy various coins at a higher price.
Crypto markets are volatile and it’s quite difficult to predict the future price movement. Investors who had bought digital coins on the recent surge lost money this week following a surprise collapse in crypto markets, which is blamed mostly on a ban on bitcoin from Tesla. Increasing Chinese regulations and uncertainty contributed to the selloff.
4. Putting All Your Eggs in One Basket
It’s one of the biggest mistakes most new investors make. If you want to play with crypto coins, it’s wise to consider spreading investments across multiple diversification strategies. Investing big on one coin could ruin your wealth and future investing plans. Portfolio diversification is widely held as a timeless strategy to mitigate the risk of major loss.
Beginners often believe that every dip in coin price is a buying opportunity. They also sometimes think that buying on the bull run is a good strategy before the price goes too much higher. In these cases, investors are at high risk of losing capital. It’s key to understand the reasons for any bull or bear run before initiating a big position.
Furthermore, using leverage for playing with crypto markets should be deployed with extreme caution and only if you are an expert. This is because of the high level of volatility inherent in an emerging digital store of value. The digital coin market has the potential to make or wipe out hundreds of billions of dollars in a few hours alone. The latest price crash is the perfect example of the crypto market volatility.
5. Make Your Exit Strategy Before Buying
Buying any asset particularly a digital coin without having an exit plan could be a disaster. You must have your stop losses in place, and a mental framework planned in advance to accomplish your primary objectives. One cannot let the losses mount if the market environment keeps getting tougher. Exit strategies helps investors to mitigate extreme losses.
On the other hand, an exit strategy is always key even if you are winning the bet. Investors who don’t have a deep knowledge of market psychology could also lose their money when they don’t sell on the rise due to expectations for further price growth. Knowing about the appropriate time of selling is the best approach for capitalizing on gains or squeezing losses.
At the start of this year, JP Morgan published an extensive study with analyst Nikolaos Panigirtzoglou. In a research note to clients, analysts at JPMorgan Chase predicted a long-term bitcoin price target of more than $146,000 based on the assumption that the cryptocurrency will grow in popularity as an alternative to gold.
In a recent interview on Bloomberg TV, the head of Ark Investment Management Cathie Wood said she still expects the cryptocurrency to reach a price of $500,000. “We go through soul searching times like this and scrape the models, and yes our conviction is just as high,” she said.
When Bitcoin rises, other altcoins usually follow the broader market trend. This means that cryptocurrencies, in general, are expected to perform well this year. But just like any other type of asset, investing in cryptocurrencies can become volatile and you should proceed with an abundance of caution before you know what you are doing.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.