The FIVE Most Common Bitcoin Mistakes

Bitcoin is a beast of a financial asset. Although it promises the potential of massive returns, the risks are high and therefore require a mindset unlike other assets. In this blog, I will look at the five most common mistakes people make when it comes to cryptocurrencies in general and Bitcoin specifically. 1) Lack of Education Financial education is a modern pandemic. People do more research before buying a household appliance than before making financial decisions and crypto is no exception. When you have no education, it is easy to be influenced by outsiders who will convince you to buy some marginal token that may have no substance. To start off with you need to understand the basics of crypto - how they are mined/issued, their scarcity, how transactions are stored, etc. Then you need to understand how to buy and sell, where to buy and sell. You also need to understand where crypto fits into the financial industry narrative and the future it will play in modern economics. 2) Short-Term Thinking There are no get-rich-quick schemes. There is no easy money. If you think you will trade your way to a million-dollar mansion in the crypto space, you will have a rude awakening. The people you see on Instagram who have made millions from trading are the equivalent of Olympic athletes. They have special skills and talents not shared by the average human being. The best way to make real money in crypto is to become a long-term investor. You want to use dollar cost averaging - every month you want to commit a fixed amount of capital to your crypto portfolio. The secret is not timing the market (which is almost impossible), but time in the market. 3) Using Gearing Gearing or leverage is where you "borrow" money. This goes back to the point of education. Many people don't understand leverage and they make no effort to understand it. Leverage is margin lending and this is how it works. Let's say you start your crypto journey with $2,000 in cash. In a 10x leveraged account, the exchange will provide you purchasing power up to 10 times your balance - in other words, $20,000. The exchange is effectively lending you $18,000 and using your $2,000 deposit as collateral. Let's assume that Bitcoin is trading at $20,000. You can buy 1 Bitcoin with your $2,000. If Bitcoin goes up by $2,000 to $22,000 or 10% you have doubled your money. You will sell your Bitcoin and generate proceeds of $22,000. You return the $18,000 that was lent to you on margin and you are left with $4,000 which is double the $2,000 you started with. That is fantastic, but look at what happens if Bitcoin goes down 10% to $18,000. The exchange will automatically sell your Bitcoin because if Bitcoin falls below $18,000, the market would have eaten away at your $2,000 and would start eating away at the exchange's money. The exchange does not want to have to be forced to recover losses from you. The exchange will sell the Bitcoin and the proceeds will be for their account. They lent you $18,000 and that is exactly what they will receive when they sell one Bitcoin at $18,000. You will be left with a zero balance. So let's break this down into simple language. Ten times leverage means you can make and lose your money ten times faster. If the market goes up 10%, you will make 100% or double your money. An easy way to work this out is to take 10% and multiply it by 10 times leverage. If the market goes up by 5%, you make 50%. So you make money quicker. The problem is that you also lose money quicker. All you need to lose your initial investment is for Bitcoin to go down by 10%. This leverage will amplify the moves of Bitcoin. Does this mean that all leverage is bad? Not necessarily. Leverage on low-volatile assets like property can be very powerful. Property prices do not move up and down in violent swings. Bitcoin and other cryptos on the other hand are highly volatile. Using high leverage on highly volatile financial assets creates a potentially toxic cocktail of risk. 4) Ignoring Fees There are two kinds of fees in the world of crypto. The first is exchange fees. The exchanges charge four fees. The first is the fee for trading. They are market makers in cryptocurrency and they charge for this service. These fees can be as high as 5% which means if you are buying $10,000 of crypto, you are paying $500 in trading fees. The second set of fees is network fees. Given that a regulatory entity does not control crypto, transactions need to be verified by the network and you are paying for these resources that are needed to validate and record your transaction on the blockchain. If you are aggressively trading crypto, these fees are going to add up - so the less you trade, and the more you invest, the cheaper and more profitable it will be. 5) Order Errors These are also known as fat fingers. This is where you enter the wrong price. When placing an order, a mere decimal point error could cost thousands. In fact, a recent error cost a seller $300,000 when he sold a premium NFT for 0.75 Ether instead of 76 Ether. You, therefore, want to take your time when placing orders. I would recommend you triple-check for any finger mistakes. Investing in crypto can be overwhelming. The most thing to do is take your time and do your homework.