Cryptocurrency or “crypto” like Bitcoin, and Ethereum is a digital asset that enables people to trade without the interference of a central authority such as a government or bank. Currently, there are more than 4,000 different cryptocurrencies in existence.

Investing in cryptocurrency provides investors with a way to diversify their portfolios which are traditionally held in stocks, commodities, and bonds. Nowadays online brokers, centralized exchanges, and even decentralized exchanges give investors the flexibility to trade digital assets without going through a traditional financial institution, and the hefty fees and commissions that come along with them make it much easier to invest. The easiest way to get cryptocurrency is either from an exchange or another user.

Investing in any cryptocurrency bears the opportunity to make solid gains. As per the report Large publicly-listed Firms like Tesla, MicroStrategy, and Twitter all invested in Bitcoin. Although this move is not suitable for every people who are willing to invest. There is a massive amount of volatility. Some investors are even scared of this nature.

Unfortunately, many investors enter the industry with little or no awareness of how cryptocurrency and the market work. This leads to occur numerous common mistakes resulting in significant losses. The decision on investing in cryptocurrency can be evaluated by understanding its operation. This will help users to reduce their losses. Let's discuss some of the common mistakes that can be avoided by investors and traders while investing in the crypto market.

Understand the Crypto Market Before Investing:

Price fluctuation in the cryptocurrency market is erratic, with prices declining dramatically in a short amount of time. Before making any decision need to consider and research the financial options before.

Storing cryptographic keys safely

Cryptocurrencies are built and supported by a technology known as blockchain which is a distributed ledger technology offering high levels of security for digital assets. On this blockchain digital transactions are created and signed with help of a private key. These keys are unique identifiers to prevent unauthorized access to your cryptocurrency wallet. Hence asset holders need to store the cryptographic keys to their digital asset wallet safely. As per the report, so far 18.5 million Bitcoin (BTC) mined which is over 20% have been lost due to forgotten or misplaced keys.

Storing coins need to be store offline to protect from risk:

Centralized cryptocurrency exchanges offer services similar to banks and these exchanges do not give access to holders of the wallets holding the tokens. Although technically these coins on the platform are stored by users the exchange still holds them, leaving them open to attacks and hence putting them at risk. There are numerous documents of attacks on high-profile cryptocurrency exchanges. When it comes to protecting cryptocurrencies against such risks, the most secure option is to store them offline, withdrawing them either to a software or hardware wallet after purchase.

Hard copy for seed phrase is important:

The seed phrase is randomly generated words in a specific order that consists of up to 24 words. To generate a private key for the crypto wallet seed phrase, need to be written down. It can be used to generate private keys and access cryptocurrencies. A hard copy record, like a printed document or a piece of paper with the seed phrase written on it, can prevent needless losses due to damaged hardware wallets, faulty digital storage systems, etc.

Sending assets to the wrong address:

It is extremely important for investors to take extreme caution when sending digital assets to another person or wallet since there is no way to recover them if they are sent to the wrong address. This mistake frequently happens when the sender does not pay proper attention while entering the wallet address. Although, in 2020 there was a case where the firm behind the world's most popular stablecoin, Tether, recovered and returned $1 million worth of Tether (USDT) to a group of crypto traders after they sent the funds to the incorrect decentralized finance platform. This is just a rare case. Usually, investors need to be very careful while adding addresses.

Putting all money into one currency portfolio or over-diversification of the portfolio may lead to significant loss:

Putting all money into a single cryptocurrency is not a choice of a good decision. Also, investors sometimes due to a sheer number of options out there and the predominant thirst for outsized gains end up over-diversifying their portfolios. Diversification of the portfolio is important to create a resilient cryptocurrency portfolio mainly with high volatility areas that broaden as much as possible but over diversifying may lead to Loss and Problems to manage the portfolio. It is important to diversify where the fundamental value is clearly related to different assets and their performance in various market conditions. Most experienced investors and experts in order to create portfolios invest at least in five different types of cryptocurrencies.

 Before investing proper and relevant market research and learning from earlier mistakes on the target currency are required to assess the risk and profit potential because crypto investing and trading is a very high risk. Patience, caution, and understanding can take to a long way. 

Indrani Bose

CBW - External Analyst

INDIA