TL;DR: The following are some of the practices that a new cryptocurrency trader can follow in order to minimize losses and, hopefully, make a profit.
- Invest Small Amounts Over Time To Avoid FOMO and Price Corrections
- Invest When the Market is Relatively Stable
- Never Invest More Than You Can Afford to Lose
- Do Due Diligence on Projects and Tokens
Trading in cryptocurrencies has become increasingly accessible as the market gains legitimacy, and regulation falls into place. However, inexperienced traders can have trouble with making profits, while seasoned traders appear to have a fundamental understanding of how the market functions. Consequently, while some traders have received enormous return on investments, others have been left in the dust by their attempts.
We’re going to look at some of the fundamental practices that a new cryptocurrency trader can follow in order to minimize losses and, hopefully, make a profit.
Invest Small Amounts Over Time To Avoid FOMO and Price Corrections
There is no place for emotions in the cryptocurrency market, or indeed any form of trading. A potential bull run or sudden sell-off tends to unsettle inexperienced traders. Observing rising prices or plummeting ones induce emotional responses to these investors, who think they are missing great returns or avoiding a bubble burst.
Fear of Missing Out (FOMO) leads to an artificial increase in the demand and price of a cryptocurrency, following which, traders must face the inevitable price correction that arrives after a sudden bull run.
Magda Wierzycka, the billionaire Co-founder and CEO of Sygnia Asset Management, said recently that investing in Bitcoin was “the biggest skeleton in her investment closet.” Wierzycka invested during the bull run that began in late 2017, buying Bitcoin at a price of $18,000. Bitcoin’s price dropped over the next few weeks and lost 80% of its market capitalization. Wierzycka’s investment in the cryptocurrency, spurred by FOMO, is indicative of a wrong decision.
Invest When the Market is Relatively Stable
Knowing when to enter the market is critical. Most investors enter the market when the prices are already high or have been on an upward trend. This takes place on the contrary circumstance too — investors panic sell when the price appears to be dropping. Planning is pivotal in making profits over the long run, a process that professional traders and managers of hedge funds have mastered.
Such a plan reduces the chances of being swayed by emotions and sticking to what data is available at hand. It helps counter the impulses created by short term predictions and market speculation. Anthony Pompliano, the Co-founder of crypto hedge fund firm, Morgan Creek Digital, emphasized this in an interview, saying,
“We have a price target as to when we think that the longer-term horizon is and what I came out and said was $100,000 by December of 2021.”
Never Invest More Than You Can Afford to Lose
As is the case with any form of investment, an investor must estimate how much risk they can afford to take, i.e. they must never invest more than they can lose. The cryptocurrency market is comparatively volatile, and prices can fluctuate quite rapidly.
There have been multiple cases where individuals had entered the market on credit, using mortgages and loans to purchase, only to lose it because of this irrational method of investing driven by emotions. The golden rule of investing applies here, which says not to invest money that one cannot bear to lose.
Do Due Diligence on Projects and Tokens
While times have changed and the market has been improved, the cryptocurrency market is still occasionally beset with projects that are effectively scams. Traditional markets have the benefit of years of oversight and lawmaking, but the crypto market is new, and lawmakers are still deliberating regulation. This makes it important to do due diligence before investing in the market.
Pump and dump, relatively common, is when the perpetrators artificially inflate the price of the token, causing a rise in demand. It initiates a ripple effect that spreads to other investors, who begin investing in it, seeing the price rise. The perpetrators then sell their share of tokens and make a massive profit at the cost of other investors. Social media platforms and communication channels like Discord and Telegram have been used to attract uninformed investors. Once the organizers have an enough number of people invested in the scheme, it can take them as quick as 18 seconds to execute their plans.
The fact that cryptocurrencies have become more accessible is an extremely positive step, but it is important to remember that the market is new and still finding its footing. The volatility holds the same risks as equity trading and therefore, one should invest in cryptocurrencies responsibly, the same way one would anywhere else. As long as rationale guides investment practices, it can be highly profitable and, potentially, even the key to early retirement.
Making Profits in the Cryptocurrency Market: A Few Fundamental Practices was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.