Investing in crypto can be exciting, but many new investors fall into common traps when it comes to trading and investing in cryptocurrencies. From poor security practices to a lack of knowledge about crypto markets, new investors can quickly lose money.
Here are the 10 most common mistakes new crypto investors make and how you can avoid them.
Key Takeaways
- There are many mistakes new and experienced cryptocurrency investors can make.
- Learn as much as you can about blockchains, wallets, transfers, fees, and popular scams to make sure you’re as safe as possible.
- A long-term investing strategy is best when considering investing in cryptocurrency.
- Always store your private keys offline and make backups.
- Using leverage might multiply gains, but it also multiplies losses.
1. Lack of Basic Crypto Knowledge
New crypto investors may be attracted to all the hype surrounding Bitcoin and other cryptocurrencies, but investing in crypto requires understanding the asset class and how it works. Investing in an asset you don’t understand or trying to trade crypto without understanding how it works is a recipe for disaster. Educating yourself on different crypto projects and the goals of each crypto company will make you a better investor.
2. Ignoring Fees
While there are many ways to buy crypto, new investors might jump into purchases without understanding how the blockchain fees, exchange fees, and other fees work. For example, buying crypto with a credit card may come with massive surcharge fees (3% or more), incure a 1% transaction fee from the exchange, and require blockchain fees to process the transaction. Depending on average blockchain fees at the time you buy the cryptocurrency, you might end up paying hundreds of dollars in fees to different entities.
Before purchasing, it’s best to learn about the fees you might face and find the exchange and times when purchases are less costly. This could save a lot of money in the long run.
3. Short-Term Thinking
The promise of “get rich quick” within the market has many new investors only thinking short term. And while there is a possibility of earning massive gains on a crypto investment, there is also a possibility of losing all of your funds to a bad investment move.
Having a long-term investment mindset will help you choose your crypto investments more carefully. Concentrate on picking higher-quality projects with long track records. Trying to get rich in 90 days is a fast way to lose everything, but thinking about crypto investing as a multiyear process will help you build a more thoughtful crypto portfolio.
4. Keeping Crypto in Online Wallets
Cryptocurrency is a digital currency which requires a digital wallet to store it. While utilizing an online wallet is more convenient, it is also far riskier than storing your crypto offline. Online wallets are more vulnerable, and hackers can drain your wallet through crypto scams or hacks. The most secure way to store your crypto is in an offline hardware wallet, which is essentially a USB stick with advanced hardware and software encryption to protect your crypto’s private keys.
5. Forgetting Crypto Passwords or Seed Phrases
Because cryptocurrency is kept in a digital wallet, these wallets require passwords to access. If you forget your password, your cryptocurrency may not be recoverable. Even if you don’t forget your password, you’ll have to remember (or store and have access to) your cryptocurrency private keys. These are long alphanumeric sequences that are hard to memorize. If you lose or forget these keys, you lose your cryptocurrency because they cannot be recovered.
Most wallets have a backup seed phrase to gain access to the funds, but if that seed phrase is lost or forgotten, there may be no alternative option for recovering your funds.
6. Wrong Wallet Address
Transferring crypto between digital wallets is how you take custody of your crypto from an exchange or send funds from one party to another. But a common mistake new investors make is attempting to transfer crypto funds to a wallet, only to mistype the wallet address.
When this happens, the crypto is sent to an erroneous wallet address and may be unrecoverable. While expensive recovery service providers claim to be able to help, their services can only go so far—the recipient must choose to cooperate.
7. Getting Scammed
As a new asset class, the cryptocurrency market is full of scammers. Chainalysis, a blockchain analysis company, found that in 2021, scammers collected $10 billion in crypto. The figure dropped in 2022 ($6.5 billion) and 2023 ($4.6 billion), but a significant amount of money is still being stolen.
These criminals employ sophisticated techniques to access your crypto wallet or convince you to transfer your cryptocurrency to them. Their favorite tactics are romance scams (pig butchering), Ponzi schemes, phishing, extortion, rug pulls, giveaway scams, and charity scams.
Crypto scams can happen through email or messaging apps, with perpetrators pretending to act in your best interest or others’. Wallets can be compromised by simply connecting the online wallet to an application and permitting it to access funds. While this is common practice for many crypto apps, scammers can use this technique to drain crypto wallet funds.
To avoid these scams, never connect your online wallet to an untrusted application, and keep most of your crypto funds in offline hardware wallets. Also, never give out your wallet password, seed phrase, or private keys.
8. Use of Leverage
New crypto investors may be enticed by stories of rags to riches through crypto trading and try utilizing leverage to multiply their returns. The problem is that leveraged trading requires up-front collateral; if a trade goes poorly, you may lose all your funds. Remember, leverage works both ways—it can multiply your losses as easily as your gains.
New crypto investors would do better to avoid trading with leverage, utilizing it only after gaining sufficient trading experience.
9. Overcomplicated Trading Strategy
New crypto investors who try to jump straight into complicated trading strategies because some YouTube influencer said it was a great idea can quickly lose money. Learning technical analysis, conditional orders, and how the crypto markets work takes time.
Investing in crypto can actually be simple. There is no need to create a complicated trading strategy to try and grow your portfolio. Like traditional investing, you can use the dollar-cost averaging strategy without the need to actively trade and glue yourself to crypto charts 24 hours a day.
10. Order Errors
While some crypto exchanges, like Coinbase, specialize in making it simple to purchase crypto, many have complicated order forms and trading platforms that confuse new users. When placing an order, a simple decimal point error could cost thousands, multiplying losses. For example, an error cost one seller nearly $300,000 when he sold a premium NFT for 0.75 Ether instead of 75 Ether.
To avoid these costly mistakes, always double-check your orders or transfers before submitting them. Crypto transfers are irreversible unless the person you transfer it to is willing to give it back, so it’s best to make sure before you submit a transaction.
What Cryptocurrency Should I Avoid?
There are thousands of cryptocurrencies to choose from. Cryptocurrencies should have a purpose, be part of a blockchain project that is solving a problem, and be actively maintained and updated. It’s best to avoid those that don’t have a clear purpose for existing.
What Was the Major Crypto Failure?
What the significant crypto failures have been is a subjective discussion. Some feel that the thousands of projects that have not been adopted or accepted are the big failures, while others point to events like Terra USD, a stablecoin that lost its peg and caused millions of dollars to be lost. Still others believe that cryptocurrency, in general, has failed to fulfill the purpose it was designed for, as a replacement for traditional monetary systems and removing intermediaries. Instead, they argue, cryptocurrency has failed as it is now more similar to gambling than to a decentralized payment system.
What Are the Three Problems of Crypto?
Cryptocurrency is a byproduct of the underlying technology, blockchain. Blockchain has three issues that prevent it from reaching its full potential of decentralizing finance. The three issues are decentralization, scalability, and security. If developers increase one of these properties, one or two of the others decrease. For instance, if steps are taken to increase a blockchain’s security, decentralization and scalability must be sacrificed to accommodate it. This is known as the blockchain trilemma.
The Bottom Line
Investing in crypto can feel overwhelming, especially when you are just getting started. However, learning more about blockchain and cryptocurrency investing and how they are targeted by thieves can reduce your chances of losing thousands of dollars or becoming a victim.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.
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