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The Top 12 Crypto Investing Mistakes You Should Avoid

A Bitcoin superhero flying over a city skyline, with various cryptocurrencies as buildings

The world of cryptocurrency investing can be an exciting yet volatile space. With the potential for significant rewards comes considerable risk. Avoid making costly errors by steering clear of these common crypto investing mistakes.

1. Failing to Prepare for Extreme Volatility

Cryptocurrencies are known for their intense price swings. Bitcoin has crashed over 75% on three separate occasions during its lifetime. These types of enormous drawdowns are par for the course in crypto.

Mentally brace yourself for the rocky road ahead. The ups and downs in crypto vastly exceed the volatility of stocks. Be ready for gut-wrenching declines one day and euphoric rallies the next. Having an iron-clad grasp of your risk tolerance will help prevent emotional decision-making.

How to Cope with Crypto Volatility

  • Diversify – Don’t put all your eggs in one basket. Spreading your investments across different cryptos smooths out some of the manic price moves.
  • Invest What You Can Afford to Lose – Don’t overextend yourself financially. Only risk money that won’t impact your overall financial health if lost.
  • Have a Plan – Strategize your crypto investments based on your financial goals and time horizon. This provides conviction during periods of extreme volatility.
  • Focus on the Long-Term – Zoom out on the daily noise and keep the big picture in mind. Cryptocurrencies are still in their infancy and have room to run.

2. Assuming Low Token Price Means a Bargain

A low nominal token price does not necessarily signal an undervalued cryptocurrency. The supply dynamics must also be considered.

For example, Dogecoin trades under $0.10 but has a circulating supply of 132 billion coins. Meanwhile, Ethereum trades over $1,500 but has just 120 million tokens in circulation. Looking solely at token price is meaningless without proper context.

Evaluate market capitalization, circulating supply, and emission schedule along with price. This gives a clearer picture of valuation and upside potential. A $1 token with a 100 billion supply is not inherently cheap.

Assessing Token Value

  • Market Capitalization – Total value of all tokens. Gives better gauge of size than individual token price.
  • Circulating Supply – Number of tokens currently available. Impacts scarcity and valuation.
  • Emission Schedule – Rate of new token creation. Affects inflation and circulating supply over time.
  • Use Case – Does the token serve a real-world purpose? Tokens with utility tend to hold value better.
  • Developer Activity – Consistent code improvements support long-term adoption and price growth.

3. Putting All Your Crypto in One Basket

The “never put all your eggs in one basket” wisdom absolutely applies to crypto investing. The extreme concentration of a single token magnifies downside risk.

Diversify between tokens and also traditional assets like stocks. Don’t go “all in” on crypto altogether. Balance your overall portfolio based on risk tolerance and goals.

Ways to Diversify Your Crypto Portfolio

  • Across Market Caps – Mix large, mid, and small cap tokens to manage risk.
  • Across Categories – Blend payment coins, platform tokens, stablecoins, and more.
  • Across Chains – Include both Ethereum and non-Ethereum assets.
  • Active and Passive – Use a mix of active selection and passive index exposure.
  • Rebalance Over Time – Realign allocations as markets shift to lock in gains and manage risk.

4. Getting Swept Away by FOMO

The fear of missing out (FOMO) runs rampant in the crypto space. Seeing coins skyrocket triggers a gnawing feeling that you’re late to the party.

Don’t emotionally chase pumps. Thoroughly research any new investments rather than impulsively buying at the top. Patience pays off more often than not.

How to Keep FOMO in Check

  • Stick to Your Plan – Having predetermined investment targets keeps you disciplined.
  • Verify Information – Cross-check sources and adopt a skeptical mindset toward hype.
  • Focus on Value – Fundamentals ultimately drive long-term price appreciation.
  • Cost Average – Make recurrent buys at set intervals to avoid mistimed trades.
  • Remember Past Lessons – Previous manias saw similar meteoric rises before crashing.

In the world of cryptocurrency, platforms like Coinbase, Binance, Kraken, and The News Spy are not just mere trading platforms; they are the gatekeepers of the crypto universe, the bridges that connect the traditional financial world with the digital frontier. They are the arenas where the battle against FOMO is fought daily.

Take The News Spy, for instance. As one of the largest and most popular cryptocurrency exchanges globally, it has seen its fair share of FOMO-induced trading frenzies. When a new coin is listed or an existing one experiences a sudden surge, the platform becomes a whirlwind of activity. Traders, driven by the fear of missing out, rush to buy at the peak, often without adequate research or a clear investment strategy.

5. Falling Prey to Scams

The crypto landscape unfortunately has its fair share of frauds. Investor greed makes the space ripe for exploitation.

If it seems too good to be true, it probably is. Safeguard yourself by vetting investments thoroughly and using common sense.

Detecting and Avoiding Crypto Scams

  • Research the Team – Who is behind the project? Do they have relevant expertise and track records?
  • Read the Whitepaper – Absence of a technical whitepaper is a red flag.
  • Verify Promises – Claims of guaranteed massive returns are clear signs of scams.
  • Check for Audits – Code audited by reputable third-parties inspires confidence.
  • Look for Big Backers – Venture capital investment lends legitimacy.
  • Start Small – Initially invest only de minimis amounts in new and untested assets.

6. Risking More Than You Can Afford

The crypto market’s volatility means you should only risk money you aren’t reliant on. Investing rent money or emergency savings can be disastrous.

Work backwards from your financial goals to construct an appropriate asset allocation. Include crypto investments only to the extent that potential losses won’t derail your broader plans.

Key Questions to Determine Crypto Investment Amount

  • What specific financial goals do I have over various time horizons?
  • What asset mix gives me the highest probability of achieving those goals?
  • How much of that ideal portfolio should be allocated to crypto based on my risk appetite?
  • What dollar amount corresponds to that percentage allocation target?
  • Am I comfortablelosing 100% of that crypto investment amount if things go south?

7. Losing Your Passcodes

Losing the private keys to your crypto wallets is an absolute disaster. Without access, your funds are gone forever with no recourse.

Securely back up passcodes across multiple locations. Also consider using a custodian rather than solely self-managing keys.

Tips for Protecting Crypto Passcodes

  • Multiple Backup Copies – Keep copies of passcodes in several secure, geographically dispersed places.
  • Durable Storage – Etch passcodes into steel plates or sheets to create durable records.
  • Secure Digital Storage – Use encrypted drives, access-controlled cloud storage, etc.
  • Custodial Services – Reputable third-party custodians store assets on your behalf.
  • Brain Wallets – Memorize passcodes as a last line of defense (not recommended as primary storage method).

8. Having Easily Guessable Passcodes

Using weak passcodes leaves your crypto funds ripe for the taking. Avoid easily cracked codes that offer little protection.

Treat passcodes like master passwords – make them long, complex, and entirely unique. Regularly change codes as additional protection.

Creating Strong Crypto Passcodes

  • Unique – Never reuse passwords across accounts or from previous codes.
  • Random – Use random character strings without personal information.
  • Long – The longer the better. 20+ characters enhances security exponentially.
  • Complex – Utilize upper/lowercase letters, numbers, and symbols.
  • Generate – Use random password generators rather than thinking them up.
  • Store Safely – Encrypted password managers help create and store strong unique codes.

9. Trusting Unreliable Custodians

Exchanges and wallet providers holding your crypto on your behalf introduce counterparty risk. Choose only the most trustworthy custodians.

Don’t put all your eggs in one basket. Spread funds across several reputable, compliant and insured custodians.

Selecting Reliable Crypto Custodians

  • Proven Track Record – Longer history with no major breaches is ideal.
  • Compliance Rigor – Adherence to regulations (e.g. KYC, AML) adds confidence.
  • Insurance Coverage – Coverage for crime or hacks protects against loss scenarios.
  • Security Audits – Independent audits validate safety of storage systems.
  • Cold Storage Use – Keys stored offline provide better protection than hot wallets.
  • Favor Established Firms – Big financial institutions inspire more trust.

10. Publicly Flaunting Wealth

Posting screenshots of crypto portfolio balances on social media is ill-advised. This broadcasts wealth and makes you a target.

Keep your crypto riches private. Being judicious about who knows of your holdings enhances safety.

Keeping Cryptocurrency Wealth on the Down Low

  • No Public Posts – Never share account details or balances publicly online.
  • Limit Sharing – Be highly selective in who you reveal specifics to.
  • Use Throwaway Accounts – If posting balances anonymously, don’t reuse credentials.
  • Keep Devices Clean – Ensure portfolio tracker apps don’t cache sensitive data.
  • Say No to DMs – Ignore private inquiries about your holdings on social platforms.
  • Keep Assets in Cold Storage – Use details not linked to your identity where possible.

11. Committing Transaction Typos

Unlike bank wires, botched crypto transactions can’t be reversed. Double check wallet addresses to avoid costly errors.

Slow down; triple check everything. What’s done on the blockchain is done. Typographical mistakes are often permanent.

Avoiding Crypto Transaction Mishaps

  • Copy/Paste – Don’t manually type long addresses. Copy/paste them to prevent typos.
  • Cross-Reference – Verify the pasted address against the source multiple times.
  • Test with Small Amounts – Try sending a small transaction first to confirm accuracy.
  • Use Address Books – Save and select from pre-validated address lists where possible.
  • Double Check Fields – Distinguish amount vs. fee carefully. Some wallets are unclear.
  • Take Your Time – Rushing leads to mistakes. Finalize transactions only when fully focused.

12. Disregarding Tax Implications

Cryptocurrency tax policies are evolving globally. Record keeping is essential to calculate eventual tax obligations.

Keep detailed records of all crypto buys/sells, income, gifts, transactions, etc. Consult an accountant to determine any tax liabilities.

Navigating Cryptocurrency Taxes

  • Know Your Tax Rules – Understand how crypto is classified and taxed in your jurisdiction.
  • Track Acquisitions – Date, value, reason for all incoming crypto.
  • Record Dispositions – Date, value, reason for all outgoing crypto.
  • Track Income – Note any crypto received as income, e.g. mining proceeds, staking rewards.
  • Document Exchanges – Note trading details including valuation at time of trade.
  • Keep Updated – Stay informed as tax policies evolve. Some rules are still unclear.
  • Hire Help If Needed – Consider a crypto-savvy accountant to handle complexity.

Frequently Asked Questions

What percentage should I allocate to crypto in my portfolio?

This depends entirely on your personal risk tolerance and investment time horizon. A younger investor with higher risk appetite may allocate up to 5-10% to crypto. Older, more conservative investors might cap crypto around 1%.

How many different cryptos should I own?

Diversifying across at least 6-12 cryptocurrencies is recommended to mitigate risk. Holding just 1-2 excessively concentrates risk. Having too many can become unwieldy to track.

What is the best cryptocurrency to invest in?

There is no one “best” cryptocurrency. Bitcoin and Ethereum are solid choices for core holdings. Beyond that, diversify across tokens with strong utility and active development.

Should I buy crypto on margin?

Leveraged crypto trading magnifies potential gains but also losses. It is very risky for those without extensive trading experience. Cash purchases or small tested amounts of leverage are safer.

How do I avoid pump and dump scams?

Do research before buying lesser known cryptos. Look for clear use cases, organic community interest, audited code, doxxed teams, etc. Don’t chase suddenvertical price moves.

Is passive crypto investing a good idea?

Passive index crypto funds can bring stability to portfolios. They smooth volatility and avoid constant trading. Using some passive strategies in combination with active direct investing is wise for most.

Should I take profits during bull markets?

Periodically taking some profits off the table helps lock in gains. Consider selling a portion after large price jumps. Have a profit-taking approach tailored to your goals.

How do I file crypto taxes?

Maintain detailed records of all crypto buy/sell transactions, income, and other relevant activities. Talk to a crypto-savvy tax professional to understand reporting requirements in your jurisdiction.