Crypto risks are many, but you can avoid lots of these risks with some understanding of what can happen.  Investing in crypto can be risky because the market can be highly volatile, with prices swinging dramatically in short periods, leading to potential massive gains or losses.  The industry is also more prone to hacks, scams, and fraud as compared to traditional markets so we need to pay special attention to how we maneuver within the space.

Investing in cryptocurrency can be very profitable but preventable losses can be catastrophic. This guide will discuss the most common pitfalls – emotional, hurried, or overlooked – and how to prevent  them.

 

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Introduction: The High-Stakes Landscape of Crypto Investing

Crypto markets are volatile by their very nature, combining the best and the worst of opportunities. The key differences compared to traditional markets are the lack of strict accountability (as with financial services firms), and insurability of deposits (FDIC, etc..).  You’re “the bank” so to speak when you’re dealing with crypto which provides you with the ability to keep your own wallets to control your assets directly (compared with a bank account where the bank holds your money for you). These systems require attention, patience, and knowledge.  It’s common to make errors due to the complexity of some of these systems in crypto. In the cases below, you’ll be on your way to understanding the types of pitfalls to be a more prudent participant & investor.

 

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1️ Mistake:  Over-Reliance on Exchanges for Storage

The Risk To Your Crypto:

Keeping your assets in the exchanges long-term can make you vulnerable to hacking, the liquidity of the exchange or restrictions on withdrawal of funds. Major sites like Coinbase or Binance do a pretty good job but they don’t hold the level of accountability you would expect with banks and major investment firms like Fidelity or Schwab.  If an exchange shuts down or gets hacked, if your passwords are compromised or if you otherwise lose control of the account you may never be able to get your money back.

You should be fine using reputable exchanges for trading, buying and transferring assets.  When you leave an account dormant is where most people begin having trouble.  Exchanges may update security protocols for access and smaller exchanges could go out of business.  If you wake up five years from now hoping to locate your assets there may be some unforeseen complications.

The Solution:

– Self-Custody: Move most of your long-term assets that you aren’t actively trading to a dedicated wallet.  A hardware wallet like Ledger or Trezor for storage are widely used.  A free version of this is a paper wallet that is literally printed which contains your public address, private key, key phrases, etc.  Once you have a wallet address that shows your crypto balance on the blockchain you’ve secured your assets outside of the exchange.  Hardware wallets and paper wallets reduce crypto risks dramatically because they are offline.  These are called “cold wallets”.

– Diversify Storage: Use exchanges for trading and then transfer your long-term holds to wallet addresses that you’ve set up access for.

– Stay Informed: Pay attention to the health of an exchange through news, audits, regulatory changes and email communication from the exchange itself.  If there was a merger of Coinbase and Crypto.com coming up (for instance), you will be notified most likely by email of the changes and where your assets will be held moving forward.

 

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2️ Mistake: Chasing Memecoins for  “Life-Changing” Gains

The Risk To Your Financial Well-being:

Memecoins aside from the small handful of long-term projects are usually useless,  illiquid, or backed by unproven teams. More than 99% crash within weeks (some within minutes) due to speculative trading or “rug pulls” where the developers exit the project (usually with most of the money).

The Solution:

–  Limit Exposure: There should be no more than 5% of your portfolio in high-risk crypto assets.

– Research Rigorously: Look for projects with transparent management, well defined road map and solid use case.

– Avoid FOMO: Do not follow social media trends on new releases – they rarely lead to long-term profits.  Social media, Telegram, Discord, etc., are widely used to fuel “pump & dump” schemes.

– Use a reputable site to vet the token first if you want to dip your toe in memecoins.  The websites https://rugcheck.xyz/  , https://www.solanatracker.io/ , https://check.quillai.network/ are widely used to check the contract for Solana and other memecoins.  These websites can warn you of the risk level of a token before you buy it.

 

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3️ Mistake: Ignoring Transaction Costs

The Disintegrating Crypto Risk:

Gas fees (transaction costs on the networks such as Ethereum) and exchange fees can decrease returns sometimes dramatically, especially for small trades. For instance, a $25 trade with a $3 fee means that the trade requires a 12% gain to break even.

The Solution:

– Optimize Timing:  It is advisable to transfer Ethereum transactions during off-peak times.  If you’re moving or swapping using the Ethereum network you can check a site like https://milkroad.com/ethereum/gas/ for the purpose of seeing how high the fees are.

– Adopt Layer 2s: Use Arbitrum or Polygon to make cheaper Ethereum transactions.

– Compare rates between exchanges and different versions of exchanges. Coinbase, Crypto, Kraken, Binance all use different fee schedules based on the type of transaction. Also check: The fees of Binance Lite may be higher than that of Binance Pro.  The same can be true for Coinbase versus Coinbase Advanced.  Always check them out.

 

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4️ Mistake: Falling for Phishing Scams

The Stolen Crypto Risk:

Malicious links  (for instance, fake giveaways) can empty wallets through viruses or stolen passwords. Even experienced traders are tempted by high-end impersonation.

The Solution:

– Verify Sources: Look for the official websites and social media handles – do not click on links provided in DMs or any other unverified source.

– Use Dedicated Wallets: You should use a separate wallet for experimental platforms.

– Do not interact with something you don’t recognize:  Do not trade or sell an unknown coin or token that appears in your wallet!  While some airdrops might be legitimate promotional tokens, many will contain malicious contracts that can grant access to drain your entire wallet.

–  Enable Security Features: Enable 2FA whenever offered and use highly secure passwords.  The slight inconvenience of 2FA (Two-Factor Authentication) is well worth the time and effort.  All reputable systems in crypto have incredible security and encryption built into them.  This leaves “impersonating you” as the easiest path for a hacker to take your money.  Using a plain-English password ending in “5-“ will pass on most platforms but this is like leaving the keys in your running car while you go grocery shopping.

 

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5️ Mistake: Emotional Trading in Volatile Markets

The Mental Self-Sabotage Risk:

Panic selling during the dips will only make a loss permanent. The decline of 50% in Bitcoin in 2020 was followed by a rise of 300%. If you’re invested in sound cryptocurrencies they will most likely make a comeback.  that has happened many times since then.

The Solution:

– Automate Discipline: To reduce the impact of timing errors, invest steadily using dollar cost averaging  (DCA).

– Set Profit Targets: To take profits incrementally (e.g., trade  10% at 50% appreciation) to buy back during the correction.

– Mute the Noise: Prevent decisions that are made in the heat of the moment on social media.

– Compare the cryptocurrencies you’re holding to others in the market.  If yours are down 10% at the same time everything else is declining you’re probably okay to ride it out.  If however, a particular coin/token loses a significant part of its’ value while nothing else seems to be declining it’s best to check the news and other sources.  Something may have happened that affected the value of the currency.  If the source of the problem is serious and long-term you may be better off moving your capital elsewhere.

 

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6️ Mistake: Over-Leveraging Positions

The “Gambler” Crypto Risk:

Leverage  (e.g. 10x margin) increases risks. A 10% price decrease will erase 100% of the leveraged capital due to high volatility.  If you’re in a region of the world where real leverage on crypto is readily available (Sorry U.S. residents) you’ll be prudent to do your research before buying contracts.

The Solution:

– Avoid Margin Trading Without Basis: If a token has dropped recently this is not a reason alone to go long with leverage.  Review charts to understand the patterns in play.  In the least you should understand the concepts of moving averages and boundaries of support & resistance.

– Risk Management: If using  leverage, keep it at 2-3x and set very strict stop-losses.

– Alternatives To Direct Leverage:  There are pairs of coins that often move together but at different rates.  Solana for instance is its’ own native cryptocurrency trading under the symbol SOL.  Radium (RAY) is a market maker on the Solana blockchain.   A high volume of activity is seen on Radium when Solana moves up and down because a lot of Solana transactions are facilitated by Radium.  Solana activity therefore amplifies fluctuation in the value of Raydium.  You could double down on Raydium if you were certain that Solana will increase in value.  Radium can move as much as 3x or more compared to the same timeframe of holding Solana.   A similar relationship exists between Ethereum (ETH) and Pancake Swap (Cake).

 

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7️ Mistake: Neglecting Basic Security Practices

The Unlocked Car Crypto Risk:

Using the same password, no two-factor authentication or saving your digital seed phrases in unsecure places is a huge mistake.  If you believe that your great-grandmother’s middle name plus a few extra characters is secure and cute at the same time then you’re a hacker’s best friend!  According to Bitwarden a password containing 9 random characters or less can be cracked in under 24 hours. A password of 13 randomly generated characters will take 31 years of computing time to decode.

The Solution:

– Password Managers: Use a password manager like Google Password Manager (free) or step up to a higher level with something like 1Password or LastPass for secure, different passwords for everything.  These systems create highly secure passwords and store them for you.  Random keystrokes that include 13 or more uppercase and lowercase letters, numbers and symbols are better than a plain English word with gibberish following it.  GumpsShrimp111 is fourteen characters but can be cracked in a matter of months of computing time.

– Physical Backups: Store seed phrases on paper or metal plates if you must.  Store them in a secure location.

– Regular Audits: Check wallet permissions and linked applications from time to time.  Don’t be afraid to create new wallets and transfer the crypto you’ve bought and interacted with personally to new ones.  Again, don’t interact with any token/coin that you did not import into the wallet – or at least move all of your assets out of the wallet before doing so.

 

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Building a Resilient Strategy

1. DYOR (Do Your Own Research): Analyze the technical details and feasibility of whitepapers and reports on anything you haven’t heard of before you invest. If an exchange offers a token there are good odds that it will be better than most memecoins. On that note these tokens can be safer, but there are no guarantees of success or failure with them.
2. Diversify Thoughtfully: Make investments across various sectors. Some take profits back to dividend-paying stocks and other traditional investments.
3. Stay Skeptical: If someone is promising ‘1000% return in a month’, this means that they are more than likely promoting something fraudulent.

 

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Conclusion: The Art of  Success: Wisdom in Action

The stupidities in crypto are fueled by the stupidity and stupidity. By  following the principles of the asset protection – from the point of view of storage, research, and  trader’s psychology – you are prepared to be better than many other people. Know this: In markets where  90% lose, survival is a competitive advantage.

 

Last Tip: Security should not be  ignored. If your seed phrase is stored online, this has to be fixed now. It determines the durability  of your portfolio.

 

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Stay Secure. Invest Wisely.