The most dangerous mistakes to make with crypto
Newbies who are just starting to use cryptocurrencies and familiarise themselves with blockchain technology often make the same kind of mistakes. Unfortunately, many of these mistakes can become “fatal” to the user or, in other words, result in the loss of funds.
In this article, you will learn about the most common mistakes made by beginners when dealing with cryptocurrencies and how to avoid them or not repeat them if they have already been made.
Conventionally, beginner mistakes can be divided into two categories:
- Investment (mistakes in trading, emotional decisions, lack of knowledge of fundamental analysis);
- Technical (mistakes when sending transactions, loss of private keys or transferring them to others, etc.).
They differ in nature, but both lead to losses of crypto assets. Investment mistakes are associated with a lack of knowledge and experience in crypto analysis, while technical mistakes are associated with a lack of knowledge of at least basic security rules.
Don’t use additional security
Crypto exchanges and wallet apps often offer additional security measures such as two-factor authentication (2FA) or multisignature. These features should not be ignored as they help protect your assets. This is especially true for exchange accounts.
For authentication in wallets, in addition to web clients, local functions are often used: PIN codes and passwords, and the applications themselves are connected to a device, so the chance of becoming a victim of phishing is minimal. But with web wallets and cryptocurrency exchanges, everything is different: they use a system of credentials with logins and passwords, having stolen which, attackers can gain access to the user’s account.
What to do
- Set maximum protection for accounts, accounts and wallets. If the application offers the possibility of setting a PIN-code, 2FA and multisignature – use them all!
- Protect linked accounts such as email. Even if the exchange has 2FA installed, if your mail account is hacked, your credentials may be at risk.
Mistakes at the send phase
This mistake is not as common as impulse investing or falling for a scam, but you should be aware of it. You can send coins to the wrong address for two reasons:
- Error in the address when copying.
- Spoofing an address without the user’s knowledge.
- Sending to an invalid address
Note: It’s important to consider the format of public addresses, so it’s best to copy them rather than retype them by hand. For example, if the address of the Ethereum wallet is written only in lower or upper case, then the checksum check is turned off, that is, it is impossible to check the validity of this address. One user lost 5,000 USDT due to not knowing this nuance and sending coins to an invalid address.
How to avoid this
- When sending, always check the address: not just the first and last characters, but the entire address. This is because malicious programs can spoof the address as you type it, leaving the characters on both sides untouched, so the user may not notice the substitution, which we wrote about in this article.
- Use mixed case addresses so that the wallet can check the checksum and display an error if necessary.
- The problem of address spoofing can be solved with the Partially Signed Bitcoin Transaction (PSBT) feature that some bitcoin wallets support. In them, users can pre-sign a transaction without internet connection and then send it to the network in another wallet. This way, you can better protect your assets, especially when you send a large amount.
Follow the rules of safe storage
To keep crypto assets safe, you must first choose the right wallet, and second, keep the wallet’s private key or seed phrase in a secure location. At the same time, it is important to store data on physical media: digital copies are easier to compromise by accessing them remotely, and they can also be lost if a hard drive fails or a device is lost.
How to properly store cryptocurrency
- Choose a wallet that has the smallest attack surface. Hardware wallets are considered the most reliable: they can only be hacked physically, which is also unlikely.
- Write down the seed on paper or a special mnemonic storage device such as Crypto Steel. If you lose your seed, you will not be able to restore access to the funds in the wallet.
- After you’ve created your wallet, try to recover it using your mnemonic password to make sure you wrote it down correctly.
- Hide confidential data from unauthorized persons.
You don’t own the keys
The reality is that crypto exchanges can be hacked, banks can go bankrupt, and services can stop working. Someone who does not own the private keys does not own the cryptocurrency. Can you imagine a situation where you give the keys to a stranger without owning them yourself? Anyone would say that this is absurd. But why is this not true for cryptocurrencies, whose value may become no less valuable over time?
This is the situation many users find themselves in, having lost their private keys and bitcoin wallet files, not thinking that a small handful of mined coins will one day be worth millions of dollars.
How not to get into such a situation
- Do not trust exchanges and custodian wallets. Store cryptocurrencies only in your own crypto wallets, especially when it comes to large amounts.
- Keep the seed phrase in a hidden place, or better, make several copies to be sure that you can restore the wallet when the time comes.
- Give one copy to a trusted source who can receive your coins in case of an emergency. Don’t share private keys with outsiders if you don’t trust them.
FOMO and FUD
One of the most common and dangerous beginner mistakes is making impulsive trades. Often, inexperienced traders rush and make rash decisions instead of analyzing everything and carefully planning their actions.
This leads them to rush to buy an asset at its peak when it is actively growing, and conversely to sell it immediately when it has fallen sharply. World-renowned investor Warren Buffett said, “The stock market is an instrument that redistributes money from the impatient to the patient.” This mechanism can also be applied to the crypto market.
Here is a clear example of how rash purchases lead to colossal losses: the PancakeSwap exchange released the Squid Game (SQUID) token, created on the basis of the popular South Korean TV series of the same name. The token caused a stir among users, as a result of which it quickly grew in value by thousands of percent. But users began to notice problems with the sale of tokens, and after a while it turned out to be an exit scam that ended in the owner shutting down the website and social networks.
How to avoid large financial losses and reduce risks when investing in crypto assets
- Try to conduct a project analysis yourself (DYOR). In the article “5 ways to analyze companies” we wrote about what to look for when choosing a crypto project for investment.
- Do not invest if you do not know much about the asset, even if it is growing rapidly. The situation with the SQUID token is a clear example of what rash purchases can lead to.
- Choose the right strategy. Trading is not suitable for everyone: you need to understand technical analysis and regularly monitor the market. The same with mining – you need to take into account the amount of investment and the cost of hosting equipment and its maintenance.
- Learn the rules of risk management, diversify your portfolio and hedge risks. Only following simple investment rules will protect you from major losses.
Expectation of quick profits + lack of patience
These two problems are of a similar nature, so it would be suitable to consider them together. Cryptocurrencies attract inexperienced users by the fact that they can quickly grow in price: some altcoins add more than a hundred percent to the cost per day. Newbies often invest thoughtlessly and do not understand what is really behind the growth of the rate of a particular coin.
In reality, cryptoassets can grow for no fundamental reason. Big players known as whales manipulate the market by artificially inflating the price of cryptocurrencies in order to attract new investors who expect to make quick profits. This scheme is known on exchanges as Pump & Dump. It works like so:
- First, a trader makes a pre-purchase.
- Then he spreads the information on the forum, in thematic chats or even in the media that the growth is justified by some future event, presenting it as inside information. This provokes a wave of purchases by small investors.
- As soon as the growth of the cryptocurrency influences the turnover, the cryptowhale fixes the profit and crashes the rate, which is then repeated by the investors who have received losses. After that, the rate often returns to previous positions or falls even lower.
The problem is that novice investors who are uninformed and do not understand fundamental analysis are unable to determine based on what factors a particular crypto asset is growing.
How to protect yourself from losses
- The first and one of the most important rules of a trader: do not invest if you do not understand what kind of asset it is and why it is growing. To this rule you can add the principle “Do not invest more than you are willing to lose”.
- If you have invested in a risky asset, set a stop loss to protect your assets from large losses.
- Do not be guided by momentary impulses and always analyze the situation: amid the collapse of the crypto market in March 2020, many investors sold their coins in panic, after which their price not only recovered, but also rose above previous levels. During this time, experienced holders increased the number of valuable coins in their portfolio. The cryptocurrency market is very volatile and can be easily manipulated by whales, but long-term investors rarely pay attention to short-term momentum.
Unwillingness to learn and develop
Why are some athletes at the top of the Olympus while others get stuck in local competitions without a chance to be in the top league? The answer is simple: champions train harder than other athletes. This applies to any field: art, programming or crypto trading.
The more time you devote to training, the better your results will be. Only a small percentage of success is luck – the lion’s share of it consists of hard work.
How to fix the problem
- Start learning. Often, beginners are stopped by not knowing where to find the right course and how to find the “diamond in the rubbish heap”. The answer to this question is simple: seek, seek, and seek. Find or create a community of like-minded people. As you gain experience, you will learn how to filter out noise, or, in other words, “separate the wheat from the chaff”.
- In the process of learning, deal in small amounts, the loss of which will not cause you much discomfort. If successful, you will not only gain valuable skills, but also profits, which will only reinforce your interest in further training.
The mistake of trading with leverage
Trading in the derivatives market is associated with increased risks of losing funds. The difference between trading with leverage and classical trading is that in the first case, the investor’s position can be liquidated, as a result of which there is a risk of zeroing the balance on the exchange.
The use of leverage is only suitable for professional crypto traders with extensive experience in trading in the financial markets. For them, this is a tool that allows them to increase their income, along with which the risks grow. According to statistics, over 90% of newbies lose their funds when trading futures, perpetual contracts and cryptocurrency CFDs. The conclusion is simple: you should not start trading with leverage if you have not mastered the spot market enough.
Investing in scam projects
The desire to get rich quickly often leads to painful losses and forces holders to invest in dubious projects: financial pyramids, fraudulent ICO projects, and so on. For the same reason, inexperienced investors fall prey to cryptocrimes.
In order not to fall into the hands of malefactors, you need to learn to distinguish promising projects from fraudulent ones. We talked about this in the article “5 ways to analyze companies”. Popular fraud methods and ways to protect against them are described in detail in the article “Scams in crypto projects: how investors lose money.”
Cryptocurrencies emerged with the goal of making the economy open, secure, decentralized and at the same time anonymous – these concepts are at the heart of blockchain technologies. The anonymity of cryptocurrencies has become one of the reasons for their popularity on the darknet, which is why digital assets have often been favored by crypto criminals.
Centralized Exchanges (CEX) are forced to follow the rules of financial regulators such as Know Your Clients (KYC) and Anti Money Laundering (AML). Therefore, all of their clients must go through identity verification procedures for legal crypto trading, which poses a serious threat to anonymity.
How to use cryptocurrencies anonymously
With the advent of Decentralized Finance (DeFi), traders and holders have the opportunity to exchange digital assets without intermediaries, (centralized exchanges).
On a decentralized exchange (DEX), no verification is required to exchange cryptocurrencies, so users remain anonymous. In addition, such exchanges have no limits, and coins continue to be safely stored in users’ personal wallets. Their main drawback is low liquidity compared to CEX, but now the largest DEX exchanges can compete with large centralized platforms.
By avoiding critical errors when working with cryptocurrency, you can protect your funds and minimize the risks of losing them. It is enough to follow the simple rules that we described in this article to get a positive experience in the cryptosphere.
The crypto market is constantly changing, and you should be extremely careful not to become a victim of scams or your own emotions when trading cryptocurrency.