Investing in cryptocurrencies and digital assets is now easier than ever. Online brokers, centralized and even decentralized exchanges offer investors the flexibility to buy and sell tokens without going through a traditional financial institution and the hefty fees and commissions that come with it.
Cryptocurrencies were designed to operate in a decentralized way. This means that although they are an innovative avenue for global peer-to-peer value transfers, there are no trusted authorities that can guarantee the safety of your assets. Losses are your responsibility once you place your digital assets in escrow.
Here we will explore some of the most common mistakes cryptocurrency investors and traders make and how you can protect yourself from unnecessary losses.
losing your keys
Cryptocurrencies are based on blockchain technology, a form of distributed ledger technology that offers high levels of security for digital assets without the need for a centralized custodian. However, this places the onus for protection on the holders of the assets, and storing the cryptographic keys of your digital asset portfolio securely is an integral part of this.
On the blockchain, digital transactions are created and signed using private keys, which act as a unique identifier to prevent unauthorized access to your cryptocurrency wallet. Unlike a password or PIN, you can’t reset or recover your keys if you lose them. This makes it extremely important to keep your keys safe and secure, as losing them would mean losing access to all digital assets stored in that wallet.
Key loss is one of the most common mistakes crypto investors make. According to a report by Chainalysis, of the 18.5 million Bitcoin (BTC) mined so far, more than 20% have been lost due to lost or forgotten keys.
Storing coins in online wallets
Centralized cryptocurrency exchanges are probably the easiest way for investors to get their hands on some cryptocurrency. However, these exchanges do not give access to the wallets that contain the tokens, but offer a service similar to that of banks. Although the user technically owns the coins stored on the platform, they remain in the hands of the exchange, making them vulnerable to attacks on the platform and putting them at risk.
There have been many documented attacks on high profile cryptocurrency exchanges resulting in the theft of millions of dollars worth of cryptocurrency from these platforms. The safest option to protect your assets against this risk is to store your cryptocurrencies offline, withdrawing the assets to a software or hardware wallet after purchase.
Not keeping a hard copy of your opening sentence
To generate a private key for your cryptocurrency wallet, you will be asked to type a seed phrase consisting of a maximum of 24 randomly generated words in a specific order. If you ever lose access to your wallet, this seed phrase can be used to generate your private keys and access your cryptocurrencies.
Keeping a paper record, such as a printed document or piece of paper with the seed phrase written on it, can help prevent unnecessary losses from damaged hardware wallets, faulty digital storage systems, etc. As with the loss of private keys, merchants have lost many coins due to crashed computers and corrupted hard drives.
big toe bug
A fat toe error occurs when an investor accidentally enters a trade order that is not the one they intended. A misplaced zero can lead to significant losses, and mistyping even a single decimal can have considerable ramifications.
An example of this big toe mistake was when the DeversiFi platform wrongly paid a $24 million commission. Another unforgettable anecdote was when a highly coveted non-fungible Bored Ape token was accidentally sold for $3,000 instead of $300,000.
Shipping to the wrong address
Investors should be very careful when sending digital assets to another person or wallet, as there is no way to get them back if they are sent to the wrong address. This error usually occurs when the sender does not pay attention when entering the wallet address. Transactions on the blockchain are irreversible, and unlike a bank, there are no customer support lines to help with the situation.
This type of error can be fatal for an investment portfolio. Still, in a positive turn of events, Tether, the firm behind the world’s most popular stablecoin, recovered and returned $1 million worth of Tether (USDT) to a group of crypto traders who sent the funds to the platform. misguided decentralized finance in 2020. However, this story is a drop in the ocean of examples where things don’t work out so well. Merchants should be careful when dealing with digital asset transactions and take the time to enter the details. Once a mistake is made, there is no going back.
Diversification is crucial to building a resilient crypto portfolio, especially with the high levels of volatility in the space. However, with the sheer number of options out there and the prevailing thirst for windfall profits, cryptocurrency investors often end up over-diversifying their portfolios, which can have huge consequences.
Over-diversification can lead an investor to hold a large number of assets with very poor returns, which can lead to significant losses. It is essential to diversify into cryptocurrencies only when the fundamental value is clear and you have a good understanding of the different types of assets and how they are likely to perform in various market conditions.
Not setting a stop-loss agreement
A stop-loss is a type of order that allows investors to sell a security only when the market reaches a specific price. Investors use it to avoid losing more money than they are willing to lose, making sure they get back at least their initial investment.
In a number of cases, investors have suffered huge losses by incorrectly setting their stop losses before asset prices fell. However, it is also important to remember that stop loss orders are not perfect and may sometimes not trigger a sell in the event of a sudden large drop.
That said, the importance of setting stop-loss orders to protect investments should not be underestimated and can help mitigate losses during a market downturn.
Investing and trading cryptocurrencies is a risky business with no guarantee of success. Just like any other form of trading, patience, caution, and understanding can go a long way. Blockchain technology places the onus on the investor, so it is crucial to take the time to learn about the various aspects of the market and learn from past mistakes before putting your money at risk.
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.