Common mistakes to avoid when investing in cryptocurrency

  • 2022-09-02

There is little denying the fact that cryptocurrencies have been the biggest investment story of the last decade. In addition to the vast fortunes cryptocurrencies and other digital assets have generated for certain individuals, the crypto world has in many respects been defined by the widespread adoption they have seen by individual retail investors.

In fact, according to recent polling by the Pew Research Center, cryptocurrencies are so popular that 16% of Americans have invested in, traded or used them. Additionally, 86% of Americans surveyed had heard of cryptocurrencies. This is significantly up from the last time the Pew Research Center asked these questions in 2015, when 48% of Americans had heard about crypto, of which only 1% had ever traded or used them.

Although there is certainly still room to grow based on the latest figures, these statistics are all the more impressive when you consider the fact that Bitcoin first emerged in 2009!

Despite this impressive growth, however, the cryptocurrency world is still rife with misinformation and misunderstandings. More importantly, many first-time investors are still worryingly ignorant when it comes to what cryptocurrencies are, how they work and what the longer-term risks of investing in them are.

In this short article, we will do a quick run through of some common mistakes you should avoid when investing in cryptocurrency. With these tips in mind, you will hopefully be able to avoid some of the shocks many novice crypto investors suffer when the ETH price or Bitcoin value swings so wildly up and down!

Use cold storage

There are two types of wallets that you can use to store crypto: a ‘hot’ wallet and a ‘cold’ wallet.

Hot wallets are digital, always online and connected to the network, which allows for quick and easy access. However, as they are always ‘online’ and stored on a server, they are also more vulnerable. As such, you should always opt to store your crypto in a ‘cold’ wallet — meaning one that is held offline on a physical device. You connect these to the blockchain network using a private key, which keeps them safe from unwanted access.

Avoid gas fee waste

Although gas fees are inevitable if you want to make transactions using cryptocurrency, you should be careful to avoid paying above the going market rates.

Gas fees are the reward that are paid to the network for verifying the transaction on the blockchain. Typically, they are calculated based on the network congestion when the transaction is initiated.

With that said, unless a transaction you need to make is time-sensitive, avoid making simple, regular transfers and transactions when the network is clogged. You can use specific tools to help you find out when network usage is relatively low.

Know your risk tolerance

As a new type of asset that is still relatively young compared to others, there is still quite a lot we don’t know about the longer-term prospects of cryptocurrencies such as Bitcoin or Ethereum, so they are still considered a speculative investment.

As with any other speculative investment, you should only ever invest as much as you are willing to lose. How much this is will depend on what your level of risk tolerance is. If you really can’t stomach the idea of potentially losing your initial investment, cryptocurrencies might not be for you!

Don’t be afraid to diversify

Another important thing to keep in mind relates to diversification, which is the process of spreading your investments out across a number of different asset classes.

If you are building up a cryptocurrency portfolio, don’t be afraid to diversify by investing in different coins rather than just the most popular ones. Having your assets spread across a number of different assets will ensure you are more resilient if there is a market downturn, particularly if the Ethereum price turns against you!

Be prepared to be in it for the long haul!

Something many novice crypto investors overlook when they are first getting started is that cryptocurrencies are very much a ‘long haul’ form of investment. This is because cryptos are still at a relatively early stage of their development and we don’t really know what the ceiling is.

You need to be prepared to wait for the long haul to see what direction the development and adoption of cryptocurrencies goes. This means being resilient when the Ethereum price proves volatile or when the markets turn against you completely!

It also means you should pay careful attention to any crypto business news to keep on top of any industry developments.