Cryptocurrency, what it is, how it works, and top eight trading mistakes for old and new investors
Cryptocurrency, what is it and how does it work? “Crypto” comes to us in the 21st century under a variety of names and types, like Bitcoin, Ethereum, and XPR – to name only a few. Cryptocurrency in those formats has become an increasingly popular alternative for making online payments. Also very popular, is investing in crypto assets.
“It is possible to get filthy rich by investing in cryptocurrency — but it is also very possible that you lose all of your money. Investing in crypto assets is risky, but can be a good investment if you do it properly and as part of a diversified portfolio”. ~ The Motley Fool
But what is cryptocurrency? A cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms, according to The State University of New York. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system.
To use cryptocurrencies, you need a cryptocurrency wallet. These wallets can be software that is a cloud-based service or is stored on your computer or on your mobile device. The wallets are the tool through which you store your encryption keys that confirm your identity and link to your cryptocurrency.
Some politicians and online cryptocurrency gurus appear to be losing faith in the cryptocurrency market – and they might not be wrong. Some of those crypto gurus can help you change your life – but unfortunately, many will not. They will draw you in with YouTube videos of flash cars, ‘proof’ of unimaginable trading profits, and systems to help you do the same.
Many online gurus promise a guaranteed system for profit in the cryptocurrency market; but these claims are often too good to be true. To help traders old and new, experts from Cryptomaniaks.com have identified and shared with us the top eight common mistakes that these gurus don’t want you to know.
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Mistake #1 – Not knowing the basics
Before investing in any crypto asset, it’s essential to familiarize yourself with the basics of cryptocurrency trading and the market as a whole. This includes understanding the basics of trading blockchain technology, how cryptocurrencies like Bitcoin work, the concept of circulating vs. total supply, and the impact of inflation on the market.
Additionally, by understanding the basics, investors can also understand how to use different trading platforms, exchanges, and wallets, which will be necessary to buy and sell their assets. If you’d like a crash course on the basics, Cryptomaniaks has created a free mini-course on how to get started investing in bitcoin.
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Mistake #2 – Not understanding the technology
Similar to understanding the basics of how to trade, it’s essential to understand what you’re trading. The technology behind different cryptocurrencies is what makes them unique and valuable. Therefore, it’s crucial to have a solid understanding of the technology before investing in a coin. This includes understanding the underlying blockchain, consensus algorithms, and other project technical details.
When researching and evaluating potential investments, it’s paramount to consider factors such as:
- The coin’s fundamentals
- The team behind the project
- The coin’s overall potential for growth.
Looking for coins with a clear use case and a strong community behind them is a great place to start. Additionally, staying informed about the latest developments in the crypto market is critical by following industry news and events and participating in online communities and forums.
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Mistakes #3 & #4 – Overtrading and making impulsive decisions
It’s easy to get caught up in the market’s hype and make impulsive buying or selling decisions.
Overtrading refers to buying and selling assets too frequently, often based on short-term market fluctuations or hype rather than a well-thought-out investment strategy. This can lead to financial losses, as investors may make impulsive decisions to buy or sell based on emotions rather than rational analysis.
Developing and sticking to a trading strategy is vital, even during market fluctuations. To achieve this, investors should take a step back, evaluate their positions and assess if they align with their long-term strategy.
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Mistake #5 – Investing more than you can afford to lose
Crypto trading is inherently risky, and the market can be volatile. This can be particularly dangerous in the crypto market, which is known for its volatility and high risk. Prices of different crypto assets can fluctuate rapidly, and there is always a risk that the value of an asset may decrease or become worthless.
Therefore, investing only what you can afford to lose is essential. Never invest your life savings or take on excessive debt to trade in the crypto market.
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Mistake #6 – Chasing cheap coins and focusing on short-term gains (FOMO)
“Did somebody say Dogecoin?” It can be tempting to chase cheap coins to make a quick profit.
Many investors, especially new ones, may be attracted to the idea of buying a large amount of a cheap coin with the hope that its value will increase in the short term. And when they see others trading these coins and making amazing profits, they fall victim to FOMO (fear of missing out)
However, these coins may not have a solid fundamental value or long-term potential and may not be worth the investment. Furthermore, focusing on short-term gains can lead to impulsive buying and selling decisions, resulting in overtrading and financial losses. Instead, focus on researching the project’s technology, team, and potential for growth and understanding the research.
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Mistake #7 – Not diversifying your portfolio
Diversifying your portfolio is vital in any type of investment, including Cryptocurrency, because it helps to spread risk and minimize potential losses. When you diversify your portfolio, you’re spreading your investments across different assets, sectors, and industries. This way, if one investment performs poorly, the others can offset the losses and minimize the impact on your overall portfolio.
For example, let’s say an investor has a portfolio heavily invested in technology companies. If there is a recession in the technology industry, the investor’s portfolio will be heavily impacted.
However, suppose the investor diversifies their portfolio by including investments in other sectors such as healthcare, real estate, and energy. In that case, the impact of the recession in the technology industry will be less severe on the overall portfolio.
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Mistake #8 – Over-diversifying your portfolio
You can have too much of a good thing. While diversification is important, it’s also important not to spread your investments too thin. Over-diversifying can lead to a lack of focus and ultimately result in weaker returns.
When over-diversifying, investors may end up investing in assets that they need help understanding or spreading their investments across assets that are not related to each other, which may lead to a lack of a coherent investment strategy.
This can make monitoring and managing the portfolio challenging and lead to lower returns on investment.
A spokesperson for Cryptomaniaks.com commented: “By avoiding these common mistakes, investors can increase their chances of success in the crypto market.
However, it’s important to remember that crypto trading is inherently risky, and past performance is not indicative of future results.
Always conduct your research and invest only what you can afford to lose.”
See:
“The Basics about Cryptocurrency” ~ and ~ free intoductory online course: “How to Invest in Bitcoin”
(Cover Photo, “How Cryptocurrency ACTUALLY Works”, Image credit: YouTube)
Posted by Richard Webster, Ace News Today / Follow Richard on Facebook. Twitter & Instagram
