The 7 Most Common Mistakes of Crypto Investors

The number of crypto investors is growing by the day. According to the “2022 Global State of Crypto” report by crypto exchange Gemini on the April 4th, 41% of cryptocurrency holders worldwide purchased cryptocurrency for the first time in 2021.

The number of crypto investors is growing by the day. According to the “2022 Global State of Crypto” report by crypto exchange Gemini on the April 4th, 41% of cryptocurrency holders worldwide purchased cryptocurrency for the first time in 2021.

However, cryptocurrencies are still largely unregulated and because they are based on blockchain technology, there are many differences to existing investment assets such as stocks and bonds. So, what should investors be aware of when investing in crypto?

1. Losing your private key

One of the most common mistakes crypto investors make is losing their private key. According to a report by crypto data analysis company Chainalysis, more than 20% of the 18.5 million Bitcoin (BTC) mined so far are inaccessible because the private key has been lost.

Cryptocurrencies are usually created with blockchain technology and are intended to be an asset controlled directly by their holders without the intervention of a central authority. This also means that crypto holders are solely responsible for their holdings. To move a blockchain-based cryptocurrency from one location to another, the wallet containing the cryptocurrency must have a private key that acts as a unique identifier to execute a transaction.

Unlike a password or PIN code, a private key cannot be reset or recovered if lost. If a user loses their key, they lose access to all assets stored in the corresponding wallet. To protect their assets, crypto investors therefore must be sure to remember and safely store the private key to their crypto wallet.

2. Storing cryptocurrency in an exchange wallet

Investors usually acquire their cryptocurrency from an exchange managed by a central institution. Often, they then keep the crypto right there in the exchange wallet. However, keeping cryptocurrency in an exchange wallet also means that they are stored in a hot wallet managed by the exchange. Investors should beware that in this case, their assets could be at risk in the event of a cyber-attack on the exchange’s hot wallet.

Crypto exchanges and coin trading platforms are the main targets of hackers because of all the money accumulated there. Upbit, Bithumb, PolyNetwork and Axie Infinity all suffered major hacking incidents, but compensation for the affected users varied widely depending on each company’s financial situation and the will of their management, ranging from a full refund to no compensation at all. The safest way to protect assets from these risks is to store cryptocurrencies in an offline cold wallet.

Together with BitGo, a leader in digital asset security, Haru Invest ensures the highest level of security through the internal system – resulting in zero security breach to date.

3. Not keeping seed phrases on a separate sheet of paper

When creating a cryptocurrency wallet, users are prompted to write a seed phrase of up to 24 randomly generated words in a specific order to generate their private key. If a user cannot access their wallet, they can use these seed phrases to generate a private key and get to their crypto assets. Basically, it is as if the seed phrase were used to retrieve the password. Therefore, printing or jotting down the seed phrases on paper can help prevent losing crypto assets due to hardware wallet damage, storage system glitches, etc.

4. Entering the wrong number

Another common mistake investors make is accidentally entering unintended trades. It sounds simple, but this mistake is so common that it has been given its own name: fat finger error. Investors should be careful when entering their crypto trades because even making a mistake with a 0 or with a decimal number can cause substantial losses.

A prime example of such a fat finger error recently occurred with a transaction of the non-fungible token (NFT) series Bored Ape Yacht Club (BAYC). One BAYC was sold for 0.75 ETH (about $3,000) instead of ETH 75 (about $300,000) due to an input mistake by the holder. In traditional banking or stock trading, there generally is an option to reverse such erroneous transactions, but for cryptocurrencies, they have to rely on the buyer’s good will.

5. Sending to the wrong address

Entry errors don’t just concern numbers. Investors need to pay very close attention when entering the address to send crypto to another person or wallet. This is because if crypto is sent to the wrong address, there is no way of recovering it. What makes this especially tricky is that crypto wallet addresses are alphanumeric, which means they are not intuitive to handle. Users should make it a habit to carefully review addresses again after entry. Transactions on the blockchain are irreversible and unlike with banks, there is no customer support center to contact for help.

6. Excessive portfolio diversification

A lot of cryptocurrency investment advice focuses on building a flexible portfolio composed of various cryptocurrencies. The reason this is suggested is to hedge risk due to cryptocurrencies’ high price volatility through diversification. However, investors should also be aware that if their portfolio becomes too complex, there is also potential for loss.

Investors attempting to excessively increase the number of cryptocurrencies held will find themselves at higher risk of owning many assets with a low return on investment. This can lead to significant losses. Therefore, it is important to only diversify one’s portfolio with cryptocurrencies that have a clear business or technical value. Doing this requires studying how the price of various assets fluctuates in a range of market conditions.

7. Forgetting to set a stop-loss

A stop-loss is a type of order that automatically sells when the price of an asset reaches a certain predetermined level. Many investors incur significant losses because they fail to correctly set the stop-loss before the asset price drops or forget to set it entirely. It is essential to make good use of the stop loss feature to protect assets and reduce losses during a downtrend. At the same time, investors need to be aware that the stop loss order function is not perfect. It might not work during a sudden price shift, so investors need to be prepared to respond quickly in a downtrend.

For blockchain investors, great power comes with great responsibility. Because there are many more technical variables than in general investment markets, they also need to invest more time to understand the various facets of the crypto market.

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