The cryptocurrency market is constantly expanding and involves more and more players: new investors, new miners and new traders, all looking for a way to maximise their profits.
When thinking about trading in the cryptocurrency market, one is often frightened by the apparent complexity of the factors that complicate speculative investment activity. Because of its volatility, trading cryptocurrencies is a fast-rising market that has become increasingly interesting for investors, who also experienced disappointment and loss of capital.
Being relatively new, the cryptocurrency market is currently not regulated by any centralised institution or authority - making it highly susceptible to speculation. In addition, there is no official historical analysis of the market, which means that there are no market movers and it is difficult to establish an adequate risk management model.
Knowing this type of market and its peculiarities is essential to avoid making mistakes that could have fatal consequences on the capital invested.
1. Oversizing the investment or setting unattainable goals
In any financial investment (including cryptocurrencies), one of the fundamental keys to success is the diversification of the portfolio. Investing a sum that is too high in relation to your available capital is never a good idea. As a general rule, you should not invest more than 5% of your capital in one asset and you should always take into account the possibility of losing it.
Due to the high volatility of the market, cryptocurrencies are often subject to considerable value fluctuations. However, this does not mean that the very high values that have been reached in the past can happen again. At the time of writing this article, for example, bitcoin is at an all-time high (above 45,000 euros per coin), but this unfortunately offers no guarantee as to what the same coin will be worth a year from now.
2. Taking the high volatility of the cryptocurrency market for granted
This point is linked to the previous one, in the sense that, although these markets can be extremely unpredictable, it should not be assumed that after a crash there will always be an immediate recovery. The bitcoin experience has shown that while a crash is usually followed by a recovery, this can be non-linear and with various ups and downs.
In this context, it is important not to ignore the unique features of cryptocurrencies. In terms of protecting your investment, we recommend that you always consider the specificities of each digital asset.
3. Not doing an accurate technical analysis
Although they have unique characteristics, cryptocurrencies are financial assets like any other and technical analysis is essential to reduce your risk profile.
While the stock market and Forex need an in-depth study of fundamental analysis (more the former than the latter, to be precise), cryptocurrencies and bitcoin mainly need the study of technical analysis. A very common mistake is to buy bitcoin or other digital currencies without taking into account the performance of charts, indicators and oscillators.
4. Keeping your position open too long
The duration of your open position is very important, especially if you trade with CFD brokers (Contracts For Difference). This type of contract, in fact, provides for the payment of overnight fees depending on the size of the investment made. It is obvious, therefore, that keeping a CFD position on cryptocurrencies open for a long time can be overly expensive.
The high volatility of the market can also create problems if a position is held open for too long. This is where a 'stop loss' system can help; this is a money management strategy that allows any trader or investor to safeguard their investment in the event that the cryptocurrency price goes against their initial expectations.
The 'stop loss' is the only available tool to reduce to the minimum the losses derived from the investment in cryptocurrency and the scope of such operation is simply to end a position that tends to lose value.
5. Problems with private keys and wallets
A Private Key is a randomly generated string of letters and numbers that is tied to the address of a particular cryptocurrency wallet. The Private Key is individual and, if it falls into the wrong hands, you can risk losing all you have in your wallet.
Unfortunately, once the private key is lost, there is no other way to prove that the cryptocurrency belongs to you, there are no options to request a new one or to recover it. A simple mistake like this could literally cost you everything you invested.
Likewise, it is possible to lose your capital by sending cryptocurrency to the wrong wallet. By the time the cryptocurrency is sent and the transaction confirmed, it is impossible to recover it. A very common mistake is sending one type of currency to a wallet intended for another type - for example, transferring Ethereum (ETH) when dealing with a Bitcoin (BTC) wallet.
6. Choosing the wrong broker
As a final point, we would like to stress the importance of always relying on professional brokers, who are recognised by the market.
Due to the success of online cryptocurrency trading, many brokers have decided to add this service to their platform. It is therefore advisable to research the reliability of the portal and choose authorised brokers who have obtained the necessary licences to offer trading services to their clients.
#cryptocurrencies #investments