Investing in cryptocurrencies and digital assets is now easier than ever. Online brokers, centralized exchanges, and even decentralized exchanges give investors the flexibility to buy and sell tokens without going through a traditional financial institution and the high fees and commissions that come with it.
Cryptocurrencies were designed to be decentralized. This means that while they are an innovative way for global peer-to-peer transfers of value, they do not involve trusted authorities that can guarantee the security of your assets. Your losses are your responsibility once you have taken custody of your digital assets.
Here we will examine some of the most common mistakes cryptocurrency investors and traders make and how to protect yourself from unnecessary losses.
loss of your keys
Cryptocurrencies are based on blockchain technology, a form of distributed ledger technology that provides a high level of security for digital assets without the need for a central custodian. However, this puts the duty of protection on the asset holders, and keeping the cryptographic keys safe in your digital asset wallet is an essential part of that.
On the blockchain, digital transactions are created and signed with private keys that serve as a unique identifier to prevent unauthorized access to your cryptocurrency wallet. Unlike a password or PIN, you can’t reset or recover your keys if you lose them. This is why it is extremely important to keep your keys safe and secure as losing them would lose access to all the digital assets stored in that wallet.
Lost keys are among the most common mistakes crypto investors make. According to a report by Chainalysis, of the 18.5 million Bitcoin (BTC) mined so far, over 20% have been lost to forgotten or misplaced keys.
Storage of coins in online wallets
Centralized cryptocurrency exchanges are probably the easiest way for investors to get their hands on some cryptocurrencies. However, these exchanges do not give you access to the wallets that hold the tokens, instead offering you a similar service to banks. While the user technically owns the coins stored on the platform, they are still held by the exchange, making them vulnerable to platform attacks and putting them at risk.
There have been many documented attacks on high profile cryptocurrency exchanges that have resulted in millions of dollars worth of cryptocurrencies being stolen from these platforms. The safest way to protect your assets from such a risk is to store your cryptocurrencies offline and withdraw the assets to either a software or hardware wallet after purchase.
Do not keep a printed copy of your seed phrase
In order to generate a private key for your crypto wallet, you will be asked to write down a seed phrase consisting of up to 24 randomly generated words in a specific order. If you ever lose access to your wallet, this seed phrase can be used to generate your private keys and access your cryptocurrencies.
Keeping a record in paper form, e.g. B. a printed document or a sheet of paper with the seed phrase written on it, can help prevent unnecessary losses from corrupted hardware wallets, faulty digital storage systems, and more. Just like losing your private keys, traders have lost many coins to crashed computers and damaged hard drives.
Fat finger bug
A fat finger error occurs when an investor accidentally enters a trade order that is not what they intended. A misplaced zero can result in significant losses, and even entering a single decimal place incorrectly can have significant repercussions.
An example of this fat finger blunder was when the DeversiFi platform mistakenly paid out a $24 million fee. Another memorable story was when a highly coveted, non-fungible token from Bored Ape accidentally sold for $3,000 instead of $300,000.
Shipping to the wrong address
Investors should exercise extreme caution when sending digital assets to another person or wallet as there is no way to retrieve them if they are sent to the wrong address. This error often happens when the sender is not careful when entering the wallet address. Transactions on the blockchain are irreversible, and unlike a bank, there are no customer support hotlines to help in the situation.
This type of mistake can be fatal to an investment portfolio. In a positive turn of events, Tether, the firm behind the world’s most popular stablecoin, Tether (USDT) has reclaimed $1 million and returned it to a group of crypto traders who sent the funds to the bogus decentralized finance platform in 2020 to have. However, this story is a drop in the bucket of examples where things don’t work so well. Hodlers should exercise caution when dealing with digital asset transactions and take their time to enter the details. Once you’ve made a mistake, there’s no going back.
Diversification is key to building a resilient cryptocurrency portfolio, especially given the high volatility in the space. However, given the sheer number of options out there and the prevailing thirst for outsized gains, cryptocurrency investors often end up over-diversifying their portfolios, which can have immense consequences.
Over-diversification can result in an investor holding a large number of severely underperforming assets, resulting in significant losses. It’s important to only diversify into cryptocurrencies where the fundamental value is clear and to have a strong understanding of the different types of assets and how they are likely to perform in different market conditions.
Do not set up a stop-loss agreement
A stop loss is a type of order that allows investors to sell a security only when the market reaches a certain price. Investors use this to prevent losing more money than they are ready to make and ensure they at least get back their original investment.
In several cases, investors have suffered huge losses because they incorrectly set up their stop losses before asset prices fell. However, it is also important to remember that stop-loss orders are imperfect and sometimes fail to trigger a sale in the event of a large, sudden drop.
However, the importance of setting stop losses to protect investments cannot be underestimated and can go a long way in mitigating losses during a market downturn.
Crypto investing and trading is a risky business with no guarantees of success. As with any other form of trading, patience, caution and understanding can go a long way. Blockchain puts the responsibility on the investor, so it’s important to take the time to research the various aspects of the market and learn from past mistakes before risking your money.
https://cointelegraph.com/news/seven-common-mistakes-crypto-investors-and-traders-make 7 Common Mistakes Crypto Investors and Traders Make