Cryptocurrencies: 5 Mistakes to Avoid When Investing in This Market

Like traditional exchanges, cryptocurrencies had a difficult first half of 2022. “Bitcoin has entered its fourth bear market (bear market, editor’s note)” in 13 years of existence, notes Vincent Boy, analyst at broker IG. And that took the whole crypto market with it. Since its highest in November, the price has fallen by more than 70% and fell to below $ 19,000 on Thursday, June 30th. A dizzying dive, which, however, is not the first. “This decline is impressive for newcomers, but is beginning to be normal for long-term investors,” explains Vincent Boy.

If cryptocurrencies are increasingly correlated with stock prices, especially for large tech companies listed on the Nasdaq in the US, they are still characterized by their very high volatility. Therefore, investing in this asset class requires you to be especially careful, otherwise you risk losing all your money. Here are five mistakes you should definitely avoid in order to make a profit in the crypto market.

>> Experience 21 Million, Capital’s newsletter on cryptocurrency. Decryptions and advice to maximize your profits in cryptocurrencies

Invest money you need fast

To get started, it is recommended to invest only the money that you do not need, neither today nor tomorrow. You need to invest a fair share of your savings that you are ready to lose without affecting your daily life or your standard of living. Cryptocurrencies are actually a risky investment with no guarantee of the invested capital. So you could potentially lose everything.

In general, it is advisable to invest “between 5% and 10% maximum” of your portfolio in cryptocurrencies, according to Stanislas Barthelemi, a consultant at Blockchain Partner, a consulting firm affiliated with KPMG.

In the medium to long term, however, bitcoin is showing an impressive performance. Since January 2015, and despite the sharp decline recorded in the last six months, it has increased by more than 1,100%. As with equities, it is an investment that it is therefore preferable to consider in the long run in the hope of achieving a nice price gain.

Invest all your money at once

You should also avoid investing all of your savings at once. Otherwise, you risk suffering market fluctuations and a possible crash. This will be the case, for example, if you invest all your savings just before a sudden price drop.

Therefore, to reduce your exposure to volatility, it is recommended to invest small amounts at regular intervals, regardless of the evolution of bitcoin and other cryptocurrencies. This programmed investment strategy has become popular in the cryptocurrency world under the name “DCA” (average cost of dollars). To do this, plan to buy a fixed number of cryptocurrencies, depending on your options: for example, 100 euros a week or a month.

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This passive strategy, which is very easy to implement, is suitable for non-professional and novice investors. It simply asks you to assess in advance what proportion of the savings you can afford to invest regularly over a given period, for example for two years or 10 years.

Follow the trend and sell everything when the market falls

As with stock markets, you should avoid trading out of sheer mimicry. And above all, to panic when prices fall. In these moments, it is imperative, on the contrary, to be patient and not adopt herd behavior. You need to take a step back from your investment, consider it in the long run. Bitcoin has accustomed us to dizzying falls, which did not prevent it from bouncing back afterwards.

If you sell your bitcoins or your ethers when prices have started to dive, you risk realizing a capital loss or regaining a smaller capital gain than if you had postponed – months or even years – the resale of your assets.

Buy only when prices are rising and already high

Similarly, it is not wise to buy only when prices have already risen well after a sharp fall, nor to acquire cryptocurrencies massively in a momentary euphoria when these assets see their value jump. You need to know how to keep your head cool and once again take a step back from your position.

The ideal is to take advantage of the decline in the market to acquire cryptocurrencies at lower prices and hope for better capital gains later, instead of buying already highly valued assets, which may still appreciate but which can also see their prices plunge.

Invest your money in any cryptocurrency

Finally, it is important to diversify your crypto investment. But to do this, you should not just invest in different cryptocurrencies without checking the project developed behind each of them. These assets are not interchangeable, far from it. In particular, you should be able to consult the “white paper” for each cryptocurrency on the Internet, which should be detailed and clear about the function of blockchain for each of these assets.

In addition to bitcoin and ether, new crypto projects are born almost every day. There are already more than 20,000 cryptocurrencies, according to CoinMarketCap, one of the reference platforms on market price developments. The ideal is to invest in the most promising projects because the cryptocurrency associated with them will have a better chance of appreciating over time. Conversely, we must avoid crazy projects, called “shitcoins” in the crypto world.

There are also a lot of scammers who want to take advantage of the hype surrounding these new assets, and scams abound. So be vigilant and be especially careful with cryptocurrencies that have just been created. Some may get their price artificially inflated before they suddenly collapse until they are worth nothing or almost nothing.

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