3 Mistakes Bitcoin Investors Make and How to Avoid Them
Bitcoin has gone from leading a small, niche market to gaining mainstream fame. It’s this fame that has drawn many new investors to the cryptocurrency market.
Of course, it also doesn’t hurt matters that Bitcoin (BTC) hit an all-time high last December, reaching almost $20,000 per coin. Some investors have been dreaming about quick riches and lambos ever since.
But the problem is that many of these same people have no prior investing experience, and they make a number of rookie mistakes.
In this post, I’m going to discuss the three biggest mistakes that I see investors making with Bitcoin and other cryptocurrencies. I’ll also cover good investing techniques along with pitfalls like pump and dump groups.
1 – Investing More Money Than You Can Afford to Lose
The absolute biggest problem that I see in the cryptocurrency world is people putting more money into the market than they can afford.
This is far from a new thing, because many people make the same mistake when buying stocks. But it’s especially prevalent with BTC, because of all the success stories that have surfaced.
Here just a few of the headline grabbing stories that encourage people to invest more money in Bitcoin than they can afford:
- Erik Finman took a $1,000 gift from his grandmother in 2014, then invested it into BTC. At age 19, he’s now worth $1.5 million.
- 50 Cent accepted $400k worth of Bitcoin for his album “Animal Ambition” in 2014. The rapper actually forgot about his BTC, only to later discover that it was worth $9 million in January 2018.
- Tyler and Cameron Winklevoss (of Facebook fame) invested $11 million into Bitcoin in 2011. Their investment peaked at over $1 billion in late 2017.
- An anonymous man who goes by the name “Mr. Smith” bought into BTC in 2010, when it cost just $0.15 per coin. He invested $3,000 into Bitcoin and is now worth $25 million today.
These are just a few of the big stores that have come out ever since Bitcoin’s explosion.
Unfortunately, this has also convinced wannabe millionaires that they too can experience quick riches. And they often overinvest to the point where they can’t even cover their current bills.
This is a huge problem when considering Bitcoin’s volatility. In fact, BTC had seen a number of high and lows before gaining nearly 100% in value last December.
I’ve seen multiple people on Reddit discussing how they’re in trouble every time the market takes a big dip.
Given that BTC is highly volatile, you never want to invest so much that you’re worried about making next month’s rent.
And if you think that a $2,000 or $3,000 investment will soon make you a millionaire, just remember that the Bitcoin headline makers got into a crypto currency much earlier.
This isn’t to say that you won’t be successful with cryptocurrencies, but take a reasonable approach to putting money into the market.
Dollar Cost Averaging
A major reason why people invest too much into cryptocurrencies is because they have a fear of missing out (a.k.a. FOMO). This leads to continually pouring money into Bitcoin, until they finally have no more to invest.
Those who have this problem should seriously consider a concept called dollar cost averaging (DCA).
This is a common investing method where one buys a fixed amount of stocks/cryptocurrencies on a set schedule. DCA calls on you to purchase more when prices are low and less when prices are high.
Here’s an example of how DCA works:
- You have $2,000 to invest into Bitcoin.
- You spread this out into equal $400 investments over four months.
- BTC is at $15,000 when you buy in Month 1.
- BTC is at $10,000 when you buy in Month 2.
- BTC is at $8,000 when you buy in Month 3.
- BTC is at $12,000 when you buy in Month 4.
- BTC is at $15,000 when you buy in Month 5.
$400 gets you different amounts of Bitcoin each time, because the price jumps up and down every month. But Bitcoin’s average cost over the five months is $12,000 (60,000/5).
Based on the $2,000 you’ve invested, you now have 0.167 deci Bitcoin.
One benefit to DCA is that you don’t have to watch charts or stress over when to buy into a particular cryptocurrency. Instead, you simply buy in at the same point every week/month.
Another advantage is that you prevent yourself from FOMO and instead spread out your investment.
The downside is that you could miss chances to buy low since you’re not watching charts. But I still recommend that new Bitcoin investors try DCA to better manage their money.
2 – Buying at the Top
Another byproduct of FOMO involves buying near or at the top of a cryptocurrency’s ascension. Let me describe how this scenario often happens:
- Bitcoin starts a big surge one day.
- Investors see that the coin is experiencing a 50% increase.
- They worry that BTC will continue increasing and get FOMO.
- They quickly invest.
- The coin continues rising to a 55% increase.
- But at this point, BTC starts on its way back down.
- Many investors don’t sell until the coin is worth less than they originally bought in for.
One of the best rules for Bitcoin investing is to never buy deep into a successful run. After all, cryptocurrencies almost always see a “correction” after a big run.
The reason why is because cryptocurrencies receive an artificial spike when they’re hot. With many people investing due to FOMO, the big increase doesn’t usually represent a coin’s actual value.
This isn’t to say that cryptocurrencies don’t ever spike and stay high afterward. But you’re almost always in the right when you avoid buying later during a big increase.
Don’t Overreact to News
An old investment saying is to buy the rumor and sell the news. The idea here is that you get in early based on a rumor, then sell when the masses react to a favorable story.
But too many people do the opposite by ignoring the rumor and buying the news. Here’s an example:
- I read a story that the Dallas Mavericks will accept Bitcoin next season.
- Obviously this is good news because the Mavericks are helping further mainstream adoption.
- The news story came out one hour ago.
- I rush to an exchange site and see that Bitcoin has increased 10% in value.
- I quickly buy BTC on Coinbase.
- Almost as soon as I buy, the price begins to drop.
- Other people knew about this rumor in advance and were ready to sell immediately.
Sometimes the price doesn’t even wait for the news before it starts dropping. This is common when a coin’s founders state that a big announcement is coming, then savvy holders begin selling 2 to 3 days before the announcement.
These same people then wait until after the news is released and the price drops before buying back in. The end result is that they end up gaining a larger position through swing trading (i.e. lasting multiple days or weeks).
Don’t Day Trade
One more thing I’d like to touch upon in this section includes day trading Bitcoin.
Many beginners feel like this is a good idea, because they can take advantage of short term price fluctuations and end up with more coins.
But this is another area where I’ve seen countless Redittors complain about losing hundreds of coins through day trading. In fact, for every one person who’s bragging about their day trading success story, I see five more saying they’ll never try this again.
What people must realize is that day trading requires extensive skill and a lack of emotions. This differs from swing training, where you’re planning a single move for days or even weeks.
If you lose when swing trading, you’ve only lost a single trade. But bad day trading losses accumulate much quicker.
Another issue to worry about here is that you need a large amount of money to get started and be successful long term. The reason why is because even professional traders have daily losses and need to cover them.
I’m not saying that you can’t take a small percentage of your funds and day trade for entertainment. But don’t make 3-10 trades per day and expect to accumulate lots of Bitcoin.
3 – Failing to Spot Value in Cryptocurrencies Before Investing
Bitcoin has brought many people to cryptocurrency trading. But once people get into the crypto industry, they often diversify into other coins too.
This is a good strategy, especially if you’re investing in projects that you think have long term value. But there’s another side that involves people pouring money into risky altcoins.
An altcoin is anything outside of the main cryptocurrencies, including Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
Investing in altcoins is a good decision if you’ve done your research and think that your holdings will have long term success. But the problem comes in when people invest without considering the value.
Some crypto projects have very little utility (a.k.a. shitcoins) and are doomed to fail. And these coins typically only get action from traders who think they can swing profits.
In these cases, you’re gambling that there’s somebody who’ll buy the coins for more than you paid. If you can’t find these people, then you’re left holding the bags as the coin decreases in value.
You can use a number of ways to find good cryptocurrencies outside of Bitcoin, but here are my personal steps for spotting good investments:
- Look at news sites (e.g. CoinDesk.com, CoinTelegraph.com) and Reddit’s crypto section for recommendations.
- Do your own research on each recommendation.
- Look at the project’s white paper and see what the group is trying to accomplish.
- Look at the team behind the coin.
- Check the coin market cap to see if there’s room for growth.
- Check to see if the foundation has legitimate partnerships in place.
- Scour the coin’s sub Reddit to gauge its popularity.
Avoid Pump & Dump Groups
Pump and dump groups are investors who meet online and agree to “pump” a certain coin. In almost every case, the targets are little known altcoins that have low trading volume.
Their goal is to quickly cause a spike in a coin and attract other investors, who fall victim to FOMO. The pump and dump group sets a target price to sell their coin at, which leaves non group members holding the bags when the price starts plummeting.
Forming an organized group to pump and dump coins is illegal in regulated stock markets. But since governments are only in the beginning stages of cryptocurrency regulation, people are getting away with this.
From a legal perspective, you’re fine to pump and dump in the crypto market right now. But even with this being the case, you should avoid doing so.
The reason why is because most pump and dump groups are led by scammers who want to take advantage of the group itself. Here’s how this happens:
- You join a pump and dump Facebook group.
- The group founders announce that they’re going to pump a specific coin at 12:00pm ET.
- The coin name isn’t released until noon, so that no group member has an early head start.
- The sell target for this unnamed coin is set at $5.
- You don’t have time to research the coin’s price history when it’s released, because the pump starts so quickly.
- You buy in at $10.
- Little do you know, the group founders and their closest circle started buying the coin at $1 before the pump.
- The price tops out at $17, before quickly crashing down.
- You’re left either selling your coin at a huge discount, or leaving your sell order up in hopes that the price surges in the future.
As you can see, many pump and dump groups have a close inner circle with another agenda. Essentially, the idea is to scam outsiders who join the group.
This is yet another reason why you should avoid quick fixes to getting rich and focus on cryptos that you deem to be the most viable projects.
Consider Value Investing
The crypto currency market is still attached to what Bitcoin does. This is because Bitcoin still has the biggest brand name in the industry.
But it’s very possible that another rising coin, such as Ethereum, could overtake BTC at some point the future. In this case, the market will become untethered to Bitcoin’s every movement.
This is when you’ll want to be holding the most valuable long-term investments. And this is where value investing comes into play.
Value investing involves seeking cryptocurrencies that you think are undervalued when compared to the market. It’s actually rather easy to do this now, given what I mentioned about the market following Bitcoin’s movements.
Market cap (price x circulating supply) can be a great tool in determining if a coin is under or overvalued. Here’s an example of a crypto market cap:
- Bitcoin is trading at $9,000
- Circulating supply is 16,840,937
- 9,000 x 16,840,937 = $151,568,843,300,000 market cap
Of course, most coins don’t even come close to meeting Bitcoin’s market cap. Therefore, you’ll often be trying to evaluate many market caps at between $300 million and $3 billion.
If you see the potential for growth based on what the foundation is doing and believe in their team, then you can measure this against the current market cap and decide if the coin will increase.
Another aspect to value investing is looking for cryptocurrencies that offer a big enough discount. The reason why is because you want to allow for margin of error, given that you’re only estimating value.
If I see a cryptocurrency that has the potential to double its market cap versus one that may only grow 10%, then I’m going with the first one as it gives me far more room for error.
Finding value in cryptocurrencies is highly speculative, because few foundations actually have a working product right now. But there are definitely some investments that have great potential out there.
Here are a few of my non-Bitcoin favorites at the time of this post:
- Ethereum (ETH)
- ICON (ICX)
- Lisk (LSK)
- Monero (XMR)
- NEO (NEO)
- OmiseGO (OMG)
- Stellar (XLM)
- Walton Chain (WTC)
- VeChain (VEN/VET)
Investing in Bitcoin and other cryptocurrencies is certainly risky due to the high volatility, but this is also what’s bringing many people to the market.
Another thing that Bitcoin investors like is the fact that they’re early adopters.
Sure, BTC has been around since 2009. But many of the altcoins are new and offer people the chance to get in on the ground floor.
What will be the next Bitcoin? This is what numerous investors are trying to figure out by putting money into projects early.
But you definitely want to avoid the three common mistakes that I discussed here when doing so. To recap:
- Avoid investing more than you can reasonably afford.
- Don’t fall victim to FOMO.
- Look for long term value.
Above all, don’t be convinced that you must buy right away or you’ll miss out. We’re still very early in the cryptocurrency game, meaning you have plenty of time to research projects and make the right investments.