The cryptocurrency market is already volatile enough without making simple mistakes that are easily avoidable.
Today it is easier than ever to invest in cryptocurrencies and digital assets. Investors have the opportunity to buy and sell tokens using online brokers, centralized exchanges, or even decentralized exchanges, without having to deal with traditional financial institutions and avoid the high commissions and fees associated with them. The cryptocurrency was designed to address this need.
Block chain technology, which underpins cryptocurrencies, is an open ledger that can provide high levels of security for digital assets without the necessity for central control. Asset holders, however, are responsible for safeguarding their assets, and they should safeguard the cryptographic keys associated with their digital asset wallets.
Private keys are used to create and sign digital transactions on the block chain, which act as a unique identifier to prevent unauthorized access to your cryptocurrency wallet. The keys you lose can’t be reset or recovered if you lose them, unlike passwords and PINs. Keeping your keys safe and secure is extremely important since losing them would mean losing access to all digital assets in your wallet.
Losing keys is one of the most common mistakes investors make. Approximately 20% of the 18.5 million Bitcoins (BTC) mined so far have been lost due to misplaced or forgotten keys, according to a report published by Chain alysis.
Wallets are used to store coins online.
Investing in cryptocurrencies is probably best done through centralized cryptocurrency exchanges. Nevertheless, these exchanges do not give access to the wallets holding tokens but provide a service similar to banks. Even though technically the user owns the coins stored on the platform, the coins are still held by the exchange, leaving the coins vulnerable to attacks on the platform.
Many attacks on high-profile cryptocurrency exchanges have resulted in the theft of millions of dollars worth of cryptocurrency. In order to prevent such risk, your assets should be stored offline, and the assets should be transferred to a software or hardware wallet after purchase.
Keep your seed phrase written in your personal diary
When you are asked to generate your private key for your crypto wallet, you will need to choose a seed phrase that consists of up to 24 randomly generated words in a specific order. If you lose access to your wallet, you can generate your private keys and access your cryptocurrencies using the seed phrase.
Keep a printed record of the seed phrase on a piece of paper, for example, to prevent needless losses from damaged hardware wallets, faulty digital storage systems, and more. To operate in a decentralized manner, traders have lost many coins due to crashed computers and corrupted hard drives, just like losing their private keys. Since there are no trusted authorities involved in the peer-to-peer value transfer, they cannot guarantee the security of your assets even though it is an innovative way to transfer value globally. You are responsible for any losses incurred.
A fat-fingered error
Investors make fat-finger errors when they enter trade orders that they do not intend to enter. Mistyping even a single decimal place can have considerable consequences, as a misplaced zero can lead to significant losses.
When the DeversiFi platform paid out $24 million as a result of being fat-fingered, there was one instance of this mistake. We have also heard about an ill-fated sale of a highly sought-after non fun gible Bored Ape token for $3,000 instead of $300,000.
In the event that digital assets are sent to the wrong person or Bitcoin wallet, there is no way to retrieve them. The sender’s wallet address is often entered incorrectly when they aren’t paying attention. Block chain-based transactions are irreversible, and unlike banks, there are no customer support lines for assistance.
Investment portfolios can be ruined by this mistake. Nevertheless, Tether, the company behind the world’s most popular stable coin, has managed to retrieve and return $1 million worth of Tether (USDT) to a group of crypto traders who sent funds to the wrong decentralized finance platform in 2020. Despite this, this story is just a drop in the ocean of examples where things don’t work out as planned. Those who handle digital asset transactions should be careful and take time to enter details. There is no going back once mistakes are made.
Number of investments
Diversifying your portfolio is key to building a resilient portfolio, especially since cryptocurrency has high volatility. Even so, cryptocurrency investors often over-diversify their portfolios because there are so many options out there.
An investor who holds a large number of heavily under performing assets could suffer significant losses as a result of over-diversification. Diversification into cryptocurrencies should only be considered where the fundamental value is clear, as well as a solid understanding of the different types of assets and how they will likely perform in different market conditions.
Failure to establish stop-loss protection.
When a market reaches a certain price, investors can sell a security using a stop-loss order. By doing this, investors can avoid losing more money than they are willing to lose and ensure they at least make back their initial investment.
A number of investors have lost a great deal of money because they set up their stop losses incorrectly before asset prices dropped. However, a stop-loss order isn’t guaranteed to trigger sales in large, sudden crashes, and can sometimes fail to do so.
Furthermore, the importance of setting up stop losses to protect investments cannot be overstated and can be effective in mitigating losses during a market downturn.
It is risky to invest in and trade cryptocurrencies. The same principles apply to trading as well, such as patience, caution, and understanding. Due to the inherent responsibility placed on the investor by block chain, it’s important to take the time to understand every aspect of the market and learn from past mistakes before investing.