W.With more than 56 million registered users on Coinbase alone and Bitcoin search results hitting an all-time high on Google, it’s safe to say that the popularity of this emerging class of digital assets has never been so high. However, analysts are increasingly divided. Some are calling crypto the future of money, while others are warning traditional banking elites of an impending bubble. Still, the influx of investment from institutional investors and corporations has helped raise investor sentiment regarding Bitcoin and other digital currencies.
Unlike stocks, currencies, and other assets, cryptocurrencies are speculative network effects and their price is directly related to adoption and market reports. For example the Bitcoin price rose from $ 40,000 earlier this year to an all-time high of $ 70,000 after Elon Musk’s electric car maker Tesla declared the largest digital coin a valid payment method. However, the price fell from its all-time high below $ 40,000 after Musk raised concerns about Bitcoin mining by non-renewable energy sources.
Although market analysts have found reliable on-chain metrics for evaluating crypto coins, it is still not obvious whether making buy or sell calls based on technical factors, mostly based on historical trends and patterns, is still a good idea. Measuring future performance against fundamental factors is a popular approach. Regardless of the method investors use, the chance of portfolio losses increases if they fail to follow basic guidelines.
Listed below are the five worst mistakes that you should avoid as a crypto coin investor.
1. Low price doesn’t mean it’s cheap
Thousands of “meme” -inspired coins circulate in the retail markets and most of them have no acceptance or no utility. Investors only buy it with the dream that one day it will turn into a million dollar bet. To do this, they hunt meme-inspired coins that can be bought in bulk. They Dogecoin, which once traded at a very low price and then saw tremendous growth – which helped millionaires and billionaires to be adopted early. Of course, a low price does not mean that the coin is being traded at a discount. In fact, it reflects its demand and its real value.
In the case of Dogecoin, Elon Musk’s support played a key role in fueling demand and encouragement from retail investors to play with meme coins. There are hundreds of other coins that are trading at a very low price. Ultimately, however, these coins usually go away due to low demand and volume, resulting in losses for investors trying to become early adopters.
2. Don’t forget your risk tolerance
Don’t invest what you don’t expect to lose. Investing is about winning and losing. However, one can mitigate losses by cleverly distributing investments according to their risk tolerance. Buying cryptocurrencies by pulling out your other investments can be an unwise move on many levels. Instead, it seems like a prudent general strategy to hold on to your long-term investments while allocating a very small percentage of your portfolio to speculative assets.
Abandoning long-term investments would make it more difficult for investors to achieve their financial goals.
3. Buy on speculation
Buying on speculation is the worst mistake many beginners make, and it can often result in investors buying high and selling low. Many newcomers just want to ride the rally and make profits without thinking about the future prospects of this coin or what factors are actually driving the price of the coin up. Earlier this year, speculation about the massive spread of crypto, as well as the wider rally in the crypto market, drove both retail and institutional investors to buy various coins at a higher price.
Crypto markets are volatile and it is quite difficult to predict future price movement. Investors who bought digital coins due to the recent surge lost money this week after a surprise collapse in crypto markets, largely due to a Tesla ban on Bitcoin. Increasing Chinese regulations and uncertainties contributed to the sell-off.
4. Put all of your eggs in one basket
This is one of the biggest mistakes most new investors make. If you want to gamble with crypto coins, it is advisable to spread investments across multiple diversification strategies. Investing a lot in one coin can ruin your assets and future investment plans. Portfolio diversification is widely seen as a timeless strategy for reducing the risk of major losses.
Beginners often believe that any drop in the price of coins is an opportunity to buy. They also sometimes think that buying on the bull run is a good strategy before the price gets too much higher. In these cases, investors run a high risk of losing capital. It is important to understand the reasons for a bull or bear run before embarking on a large position.
In addition, the use of leverage for playing crypto markets should be used with extreme caution and only if you are an expert. This is due to the high volatility inherent in an emerging digital store of value. The digital coin market has the potential to make or wipe hundreds of billions of dollars in just a few hours alone. The recent drop in prices is the perfect example of the volatility of the crypto market.
5. Make your exit strategy before buying
Buying an asset, especially a digital coin, without an exit plan could be a disaster. You need to have your stop losses in place and a mental framework planned in advance in order to achieve your primary goals. You cannot let the losses increase when the market environment is getting tougher. Exit strategies help investors to mitigate extreme losses.
On the other hand, an exit strategy is always key, even if you win the bet. Investors who do not have a thorough understanding of market psychology could also lose their money if they do not sell on the rise in anticipation of further price growth. Knowing when to sell is the best approach to capitalizing on profits or reducing losses.
Earlier this year, JP Morgan published an extensive study with analyst Nikolaos Panigirtzoglou. In a research report to customers, JPMorgan Chase analysts predicted a long-term forecast Bitcoin price Target of more than $ 146,000 based on the assumption that cryptocurrency will become increasingly popular as an alternative to gold.
In a recent interview on Bloomberg TV, the head of Ark Investment Management, Cathie Wood, said she was still anticipating a price of $ 500,000 for the cryptocurrency. “We go through such soul-seeking times and scrape off the models, and yes, our conviction is just as high,” she said.
When bitcoin goes up, other altcoins usually follow the broader market trend. This means that cryptocurrencies are generally expected to perform well this year. But just like any other type of asset, investing in cryptocurrencies can become volatile and you should proceed with great caution before knowing what you are doing.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.