Cryptocurrency has been the hottest thing in tech now for well over five years. It's enduring popularity lies with the fact you can make money with it - and everyone loves to make money. Trading Bitcoin and other cryptocurrencies has become a popular form of income for a growing percentage of the population. In 2021 Coinbase, one of the largest crypto exchanges, predicts year on year revenue up a whopping 300%! With the recent pump of Bitcoin to an all time high of $64,829 USD, and word about massive profits to be made spreading like wildfire, more and more people are jumping on the crypto bandwagon. The crypto market is very different to more conventional markets and the opportunities to lose all your money are plentiful. So, we put together an article outlining five of the top ways to lose money trading crypto and how to not get caught out.
Scam coins
At the time of writing this article in 2021, there are over 10,000 coins out there. That is a huge number of development teams trying to pump up their coin and basically print money. The number one way of losing money in crypto is investing in scams and low quality coins. Before buying into any coin, you should do a little research on what that coin offers and why it should have any value. At the end of the day, most of these coins are just created into existence, much like fiat cash, and have no actual value. It is the team backing the coin and what the coin can offer, like very low transaction fees or smart contracts, that give it value. Shit coins and meme coins should be avoided at all costs. Once the meme hype wears off, the value of the coin always returns to zero and whoever bought in at the top of the hype is left holding the bag.
To identify a coin that is worthy of investment you should:
- Search for the coins whitepaper, read it thoroughly and make sure you understand it.
- Research the team behind the coin and their history.
- Identify the team's intent behind making the coin - did they make the coin to solve a real world problem or was it made to turn a quick profit?
- Does the coin have a long history or was it recently created?
All non-scam coins have a whitepaper detailing what the coin is for and what problems it solves. Look for whitepapers that are informational and explain what the coin is. If the whitepaper is very flashy and full of marketing gimmicks, yet doesn't answer any technical questions about the coin, it is likely a pump and dump scheme. Here is the original Bitcoin whitepaper as a good example of what to look for.
Research the team behind the coin. Do they have a technical background? Have they worked on other cryptocurrencies before? Have they been involved in any scams or do they associate with sketchy individuals? Finding the answers to these questions can help you avoid pump and dump scams and avoid losing money.
If the coin has been around for years and has a good community behind it, it is likely to be a legit coin that solves real world problems and is safe to invest in.
Dodgy exchanges
Crypto exchanges have been hacked many times since Bitcoin was created. Very often when this happened, anyone who had funds on the exchange lost those funds. This is why it is a good idea to create a fresh wallet address on an encrypted USB and store your coins offline. This is a lot more work but can save you thousands if the exchange is compromised. It doesn't always take an external hack either, an employee or founder of the exchange can run off with your funds and leave you with nothing. This is why it is better to not trust the exchange and to store your coins offline. Yet, we want to trade crypto and the only place to do that is online on an exchange, so how do we mitigate the risk? We can do that by distributing our funds on more than one exchange and only keep funds on the exchange that we are actively trading. All profits and long term holdings are moved offline to a personal wallet address. This way if an exchange goes down, you only lose a small percentage of your portfolio. Having accounts on many exchanges also lets you trade arbitrage and make additional profits.
Over hype and meme coins
I touched on meme coins above when covering scam coins however this also fits well with over hype. Bitcoin has some notorious bubbles throughout it's history. Each lead up to a bubble had endless Bitcoin 'experts' and pundits further spewing out the rhetoric that Bitcoin "can only go up" and "Bitcoin 100k by June" and "to the moon". This strengthens the perception and hype around the asset, creating an echo chamber and resulting in a bubble. Eventually reality catches up and the bubble pops and massive gains are wiped out in days or hours. This always happens whenever "grandma starts talking about bitcoin". As the everyday man and woman on the street who just heard about Bitcoin moves in and invests, the bubble pops and everyone gets destroyed. This only tarnishes the image of Bitcoin and prevents widespread adoption as the greater masses get a bad taste in their mouth over crypto. Meme coins are created purely for this massive pump and dump bubble exploitation. Avoid meme coins and over hype so you don't buy in at the top like grandma.
Leverage
This is the first topic on this list that actually has to do with trading itself. For those who don't know what leverage is, we can look at Investopedia for the definition:
- Leverage is the use of borrowed funds to increase one's trading position beyond what would be available from their cash balance alone.
- Brokerage accounts allow the use of leverage through margin trading, where the broker provides the borrowed funds.
- Forex traders often use leverage to profit from relatively small price changes in currency pairs.
- Leverage, however, can amplify both profits as well as losses.
Essentially, leverage lets you make big trades with a small starting portfolio. If you only have $1,000 in your account, you can make a $10,000 trade and get the full profits from doing so. Sounds pretty good, especially for a new investor that doesn't have a large amount of cash to trade. The downside comes when you don't profit but instead have losses. Leverage will not only amplify those losses, so instead of losing $100 on a trade you will lose $1,000. Furthermore, it will also auto liquidate all your other positions to cover for that lose. You can have a portfolio balance go from thousands of dollars to literally zero, with no positions, in an instant. Crypto has some wild fluctuations in price and I remember one time when I was using leverage, the price spiked down about 30% in a matter of minutes then bounced back up like nothing happened. This was enough though to close my leveraged position and empty my cash balance - ouch. If you are new to trading or unfamiliar with the crypto market, don't use leverage.
Attempting short term trades overnight
To understand what this tip means, we have to know how the crypto market trades. Bitcoin and all other cryptocurrencies trade 24/7 365 days of the year. The market doesn't close at the end of the workday and it doesn't close on public holidays. So if you have open trades overnight, you may wake up the next morning to see you have lost money. While this is fine if your trading strategy is to buy and hold for weeks or months, if your strategy is to buy a coin and hold it for only hours or a day, you will lose money overnight. Short term trading functions on profits of around 5% and you can easily see a position go from being up 5% at night to being down 5% the next morning. That's why you should sell your coins before bedtime if your strategy is short term. Watching the market for a good exit point each day can be quite labour intensive and impractical if you do anything other than sit in front of a computer all day. That's why I recommend a signal provider to notify you on market exits so you can get out at the right time.
Whether you're a new trader or an experienced one, knowing these five tips can help save you from endless headaches and lost profits when trading in the crypto world. Crypto is wild and volatile has enormous potential for innovation, and profits to be made. Make sure you educate yourself before jumping in and you will share in these profit.
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Authored by Brendo @ The Trader's Blog
