7 Reasons why Investors lose Money in Cryptocurrency Investing
Losing money in the crypto market is no different than the stock market…there are similar factors that make one lose money but the magnitude of losses differ due to the volatility witnessed in each market.
It’s known that cryptocurrencies are highly volatile that is why credible Cryptocurrency Exchanges and Brokers alike warn investors to trade only a sum they can afford to lose.
Of course, a certain measure of risk should be taken to earn a desired return, but where should we draw the line?
As of date many investors have made fortunes from this blockchain technology, also, a lot of people have recorded losses too.
This is not to discourage you from investing in your favorite coins and tokens, many investors made exponential gains “buying the dip” when many other investors panic sold during Bitcoin’s price crash in early April 2021.
In this article, I’ll share 7 reasons investors lose funds trading crypto…
📌 The fear of missing out can drive one to buy none profitable coins.
📌 Investing with borrowed funds could makes one lack the discipline and patience needed to trade profitably.
📌 Not doing your research makes one ignorant and hence lose money unnecessarily.
📌 Lack of good trading strategy and not setting risk-reward ratio can lead to inevitable losses.
📌 Investing in an illiquid cryptocurrency is a sure way to losing money.
📌 Investing with a dubious crypto exchange and storing crypto in an unsecured wallet.
Of course, crypto investment or trading like any other asset is not immune to losses. eToro notifies its users that about 67% of retail investors lose money trading these kinds of instruments.
Seven reasons why you lose money in crypto trading.
1. The Fear of Missing Out (FOMO)
Back in 2009 when Bitcoin was launched, the coin was worth about $0.0008. Amazingly in 2021, the giant cryptocurrency registered a hallmark of $64,000 for a coin.
This massive progression makes a lot of crypto investors who sold their coins earlier and those who refused to buy because they thought it would not amount to anything in the future miss out on the great fortune.
Consequently, the scenario with Bitcoin has implanted the fear of missing out on some other investors as they rush to buy altcoins when their prices increase a bit with the hope that it would keep rising just like Bitcoin did.
However, many of the assumptions went south as the prices dropped as soon as they rose, resulting in losses as they were bought at their highest prices.
Investors need to understand why prices move in a certain direction while doing some fundamental analysis before investing. Do not rush into investing because you do not want to miss out.
2. Investing with funds meant for other purposes.
It is a common misconception that investing in crypto assets is a sure way to get rich quickly. Hence many people invest with loans, school fees, house rent, and other funds meant for other expenses that they well know will reoccur.
An investor I know borrowed $500 and invested in crypto. During the March-April 2021 dip when most coins dropped prices, he lost about $395. When the time to repay the loan came, he withdrew the $105 left and had to borrow from other sources to pay up to avoid interest from piling up.
The situation would have been different if the investor had invested with funds he could afford to lose, that way he could wait patiently till the price rise again and get his profits.
Crypto investment is like any other business, profit is not guaranteed, you can lose too. Lots of investors had lost their money, houses, cars, and other valuable properties because of this wrong mindset. Hence, always invest with funds you can afford to lose.
3. Ignorance and Naivety
Generally, ignorance is negative and can ruin investments. In business, it can cost you a fortune. Just like the Holy Bible says, “people perish because they lack knowledge”.
Novice investors dashed into investing in crypto assets without carrying out adequate research on their prospects. If asked why, they reasoned that since people are buying it, then it’s promising.
In the long run, they end up buying coins that later get delisted from exchanges or are owned by scammers.
Many altcoins are overhyped on social media to mislead unsuspecting victims into investing in them. Hence, do not buy any coin just because people are buying it. Carry out your research on it to verify its authenticity and viability in the market.
4. Risk reward ratio and Stop Loss
Not defining your risk-reward ratio is one of the major reasons you can easily lose your money when investing in crypto assets.
The risk-reward ratio is a metric that analyses your potential gain on every dollar you invest. For example:
If you target a profit of $5 and you risk $2 if the trade went wrong, it means for every trade you make, once you lost up to $2, it would automatically stop to prevent more loss.
Setting a good Risk-Reward Ratio coupled with a good trade strategy is very crucial in enhancing your profitability in crypto investment. Though it is not easy, getting it would surely help you to manage and mitigate losses well.
5. Investing in the illiquid cryptocurrency
Illiquid assets are the easiest to buy and most difficult to sell because no one wants to buy them from you. They are similar to “pump and dump” investments schemes that were manipulated by the promoters from the very start.
There is no clear difference between wrong or right Investment. It is often about taking calculated risk and luck as investors sometimes make a huge profit from investing in some assets which later become useless. Meaning they were just lucky to invest in those illiquid assets at the time they did.
Hence, it is not easy to predict what coin would still be viable in the long run, however, when you do deep and diligent research, you would have a better chance at choosing a very promising asset for investment.
While researching, aim at identifying what differentiates your prospective coin from Bitcoin and its useful application.
6. Crypto asset scams
As cryptocurrency keeps gaining wide acceptance from people all over the world, it has become an avenue for scammers to carry out their various criminal activities. the vast number of people involved in cryptocurrencies trading makes it easier for them to exploit unsuspecting victims.
The Federal Trade Commission (FTC) recently declared that close to 8,000 crypto investors were scammed of about $80 million between Oct. 2020 and March 2021 alone!
Beware of scammers if you don’t want to lose your money. some of them impersonate government agencies or a public figure claiming to give you money in exchange for your coins. They might also approach you by promising to offer private crypto trading hints.
Steer clear of any suspicious activities. In case you fall victim, contact the FTC, SEC, and also the exchange via which the trade took place.
SEE ALSO: How to Flee these 10 Bitcoin Scams Now!
7. Exchange Hacks and Wallet Password loss
Cryptocurrency transactions are done online; hence most wallets are online. Sometimes, hackers bypass the security measures and get hold of these wallets to steal the coins in them.
Hackers have various ways of entrapping their victims. Therefore, you need to be extra careful when trading. Diligently research and confirm that the wallet you want to use has adequate security measures to keep your cryptocurrency safe.
You can as well opt for an offline wallet that allows you to have exclusive access to your crypto via a secret password. However, these wallets are prone to physical theft. More also, once you lose your password, you can end up losing your crypto assets locked inside permanently.
Choose the storage method you are more comfortable with, just ensure you understand the merits and demerits.
There is almost no end to ways in which you can lose money when investing, as it can occur due to mistakes, carelessness, or unforeseen circumstances. However, this article has listed the common ones that are responsible for most losses.
The bottom line is that if you want to prevent unnecessary loss when investing, you should invest your time and money to learn how to trade/invest crypto and risk management.