TIFU: Biggest mistakes crypto beginners make
- From FOMO to Fraud
- Learn to protect your keys
- Always DYOR
- Don't be put off
The appeal of crypto is ramping up as increased awareness and adoption drives up the price, but it still remains intimidating for newcomers, largely because a lot of the processes and terminology are not intuitive. In short, it is easy to f#ck up, so to help those about to start and ease the embarrassment of those who learned the hard way, here are the common and costly mistakes newcomers have been known to make getting into crypto.
FOMO is short for fear of missing out. It's a popular term in the crypto describing the motivation to buy crypto when the markets are pumping. Where rational thought might suggest rising prices are when to take profit and that waiting for a dip is ideal for entering the market, many newcomers just can’t shake that feeling that they are missing out on the party. Turns out that once you can see the bandwagon, it may already be too late.
The more significant a price movement is, the more likely the price will retrace, but if you do succumb, don’t panic sell and hit two Noob mistakes with one stone.
Many newcomers just can’t shake that feeling that they are missing out on the party. Turns out that once you can see the bandwagon, it may already be too late.
You must have a big heart when trading in a volatile market like cryptocurrencies. Most beginners make the mistake of hitting the sell button at the first major red candlestick.
There is a sense in having a point where you cut your losses - known as a Stop Loss - but that should be something you decide in advance, rather than a knee-jerk reaction to seeing your investment shrink.
Crypto is volatile, and if that isn’t something you are comfortable with you should not invest. There is no guarantee a decline will be reversed but Bitcoin has endured numerous dramatic declines, only to hit new All-Time Highs.
Don't panic; sell when you feel it is the right time to take out profit or cut down losses, not through pure fear or constantly checking the price.
All that glitters is not gold. Most cryptos are volatile, including the most popular ones, like Bitcoin or Ether. 5%-10% price change in a single day is very common, Bitcoin dumped 50% over a couple of days in March 2020.
The market is always moving, either downwards or upwards. It's possible that the market may stay bearish for months, or even, years. So, if you are entering the crypto industry, be prepared for extreme volatility or bearish markets. To quote the Mandalorian, ‘this is the way’. Be prepared, as things will get ugly, but there is always the darkness before dawn.
Checking the Price Every 5 minutes
Investing in crypto can be exhilarating at times, especially when the price shoots up and with it your net worth. The first time that happens you get a huge dopamine hit, and before you know it you are checking the price every 5 minutes to rediscover that feeling.
You’re likely to be disappointed and worse, left feeling miserable when things go the other way. Crypto is volatile, and if you watch price at small intervals you are forcing yourself to ride a rollercoaster, whereas - unless you are a Day Trader - it is much better to put it at the back if your mind, and check on things at much longer intervals, much like tending to a plant, except Bitcoin doesn’t need regular water, just to be kept safe.
Protect Your Private Keys
To protect their funds Crypto users need to secure something called a Private Key - a long, unique string of characters that provide access to the funds. Private Keys can be rolled up into a Seed Phrase - 12/24 unique words, which in the same way becomes the key to your crypto treasure.
The Seed/Private Key is all that separates your funds from hackers/scammers, so NEVER SHARE IT. No service will ever ask you for it, so don’t be fooled.
A classic example of this mistake was showcased by Bloomberg TV back in 2014. The guy hosting the show gave Bitcoin gift certificates to the other two hosts. One of them opened up the gift to reveal the QR code of the private key in full HD. A Reddit user took the gift by scanning the code. The point is to keep your private keys "private".
No, You Don’t Have To Buy a Whole Coin
Most newcomers think if they want to enter the crypto space, they will have to spend thousands of dollars to buy a whole Bitcoin. It reveals not only a misunderstanding but also a psychological barrier for crypto adoption. But, this isn't the case.
Bitcoin and other popular cryptocurrencies are fungible, meaning they can be broken down into smaller parts. For example, Bitcoin can be broken down into 100 million Satoshis (the smallest unit of Bitcoin). Users can buy a few hundred satoshis, and still, be part of the crypto industry.
Saving Your 2FA Recovery Codes
Using two-factor authentication (2FA) to protect centralised account services, like custodial apps or exchanges is essential for personal security. However, crypto users tend to forget to back up the details that are required if for whatever reason you lose access to your phone, through loss, theft, or upgrade.
Without them, you are in a world of pain proving that you are the rightful owner of an account. You should expect to have to record a video, saying the date, holding your passport, and possibly doing a handstand (well not the last part). So always back up your recovery codes.
Sending Funds To the Wrong Address
Blockchain transactions are irreversible. Once you've made a transaction and if it turns out to be wrong, there is no way you can get back your crypto. Besides, no law exists that mandates a third party to refund the amount.
So, you must take great care in sending cryptocurrencies to correct addresses, as well as providing the right address to others to receive transfers.
Use address labels to minimise errors and familiarise yourself with destination tags (aka memo) as cryptocurrencies like XRP, XLM, EOS, etc., require them to identify the receiver of a transaction. Transferring either of these cryptos mandates you to enter a destination tag, or else, the transaction can be stuck or even lost.
Entering Crypto With Zero Knowledge
The crypto market differs significantly from the traditional financial market. The industry moves fast and updates are released frequently. It's imperative to familiarise yourself with the world of crypto so you know where you're investing in.
Once you understand the tech, you can read through Whitepapers before investing so as to ensure you're not throwing money into some random coin and that you know its use case. Too many people jump in without following one of crypto’s most important rules: DYOR.
Falling For Scams
The total market cap of crypto is now over $1.5trillion and where there is wealth, there will be those who want to scam their way into getting some. The crypto space is filled with scammers and spammers, especially as there is no customer support in the decentralised world. One slip and you might end up losing all your cryptocurrencies. Some of the most common scams are:
Investment Scams: In this scam, the scammers would promise high returns on your investment with little risk. Examples of investment scams include Ponzi or pyramid schemes. Even some of the ICOs are also scams. In some cases, social media influencers are also engaged in promoting scam coins. So, do your own research, read through white papers, and communicate with credible crypto communities to clear your doubts.
Giveaway Scams: Scammers promise you free cryptos in return for verifying your wallet address by sending some cryptos to an address specified by them. These are known as giveaway scams, which are quite popular on social media channels, like Facebook, Twitter, and Telegram. Scammers can create fake accounts or even hack high-profile accounts to perpetuate the giveaway scams. Last year, someone hacked Elon Musk's account and tweeted the link to the crypto wallet used for the scam.
Phishing Scams: They are not limited to the crypto universe. Scammers use phishing techniques to get hold of people's email accounts, bank accounts, social accounts, and other password-protected accounts. In the crypto space, threat actors aim to get access to your crypto assets. The common method is to trick users to use a clone of the website instead of the original website. A user enters the information and it goes to the spammer. So, it is better to double-check the address of a website before you enter personal information.
ICO Scams: ICO is short for Initial Coin Offering. It is a fundraising initiative for a crypto project. In ICO scams, project owners convince people to buy new tokens in an ICO. As soon as enough tokens are bought, scammers disappear with the funds. There is no particular way to detect an ICO scam. So, it's recommended that you research a project thoroughly before investing in its tokens.
Buying ‘Cheap’ Coins aka Unit Bias
In terms of cryptocurrency, Unit bias is where investors place greater value on owning whole units of a cryptocurrency instead of a fractional quantity.
For instance, someone entering crypto space could spend $1,800 for the whole Ethereum, or spend a similar amount for buying 0.031167 Bitcoin. Somehow, buying a whole coin feels better than buying a tiny fraction for the same amount of money.
As much as it sounds appealing to buy a whole coin, the underlying value is not connected to the nominal price. That being said, there is no harm in diversifying your portfolio to stay invested in multiple digital assets, so long as you DYOR.
Not Understanding Fees or Gas
Fees on transactions are an integral part of using cryptocurrencies. For each trade, you are required to pay a small sum to the facilitator of the transaction. In general fees are comparatively low in the crypto industry compared to tradfi.
However, the rise of decentralised finance with a huge demand for Smart Contract transactions has pushed fees through the roof. If you don't understand fees or gas, you might end up like a user who paid $3.9 million for a $200 transaction.
Reacting to FUD
FUD refers to fear, uncertainty, and doubt; which is used to describe news stories, or announcements spreading unnecessary negativity surrounding the crypto industry.
A recent example is of India banning cryptocurrency. Though the Indian government didn't impose any ban on crypto, news sites continuously published stories treating ban as inevitable, which creates uncertainty among crypto holders. FUD makes them sell off their holdings, which can turn out to be a costly mistake.
So, unless you know for sure or have thoroughly researched the news, don't react to FUD. Right now the environmental impact of Bitcoin mining and the supply economics of Tether are two common FUD topics.
Ignoring The Taxman
In the majority of countries holding crypto isn’t illegal, but you will be expected to keep records of any profit and pay tax on it. The rules vary depending on the country and will only kick in above certain thresholds but too many people simply ignore the fact that governments are wising up to the profits their citizens are making from crypto and want their cut.
Many exchanges are being forced to share info on their customers, so burying your head in the sand isn’t an effective solution.
Getting Sucked Into Pump & Dumps
There are social media groups that provide signals for trading cryptocurrencies. Are they good? Big no! Such groups are impractical because there is no way anyone can predict the market right, especially cryptos.
Let's understand how they work. For example, a Telegram group with over 50k members decides to pump a coin. They will agree on a specific time to invest their money on a certain coin, which will definitely pump due to the huge volume of money coming into the market. By the time new buyers realise the momentum is already likely to have run out, smart players and whales have exited the market with profit, leaving the latecomers holding an overvalued coin.
Remember prices go up the stairs and down the elevator.
Don’t have nightmares
Though the intention of this article is to highlight things that can go wrong for crypto virgins, it is important to remember all the positive reasons to get into crypto. The most significant wealth transfer in generations is happening right now, so don’t give up because it seems a bit scary, just make sure you do plenty of research…..then go do some more.
The common mistakes we’ve highlighted reflect misconceptions about what cryptocurrencies are or what they do, and scammers know this more than most, which is the reason they try to pick off newbies.
But by the same token, the community is supportive and helpful, with users on places like Reddit or Twitter are only too willing to help out or cheer on a first-time crypto investor.
Better to ask a dumb question, than make a dumb or costly mistake. The crypto community is more forgiving than you might imagine just tread carefully and learn from the mistakes of those brave pioneers that went before you.