Top 5 Cryptocurrency Trading Mistakes Every Rookie Investor Should Avoid

Despite what chartists and technical analysts may tell you, trading is much more an art than a science. This applies doubly to cryptocurrency trading, which takes place within an immature and highly volatile space, where prices can move up and down at a moment’s notice, driven by illiquidity, manipulative whales, and social media-driven herd behavior. It’s into this space that millions of new investors wade every year, and given just how unpredictable crypto can be, it’s no wonder that so many of them end up losing money.

This situation isn’t helped by the obvious fact that most new traders aren’t particularly experienced when it comes to trading. Many commit basic errors and fall into dangerous traps when making their investment decisions, led by a mixture of confusion, misinformation, FUD, impulsivity, and impressionability. However, avoiding these errors and traps is easier than many new traders might suppose, as we explain below.

These 5 cryptocurrency trading mistakes are very common, and while they’re relatively easy to recognize, escaping them can be difficult for rookie investors, particularly when the stakes are so high. But it’s because the stakes are so high that every cryptocurrency trader should take a step back to think about investment rationally and strategically, in terms of a realistic, informed expectation of what they think really is going to happen and what their exit strategy should be.

1. FOMO, Following the Herd and Buying High

This is the big one, and it’s one that far too many newbie traders make. This is unsurprisingly really, given how much the cryptocurrency market and sector are constituted by social media and the Web.

Put simply, far too many of us receive information about cryptocurrencies from (usually anonymous) accounts on the internet. On top of this, social media creates the potential for viral investment fads, as a mass of people rally behind a particular cryptocurrency, almost solely because others are doing the same.

An indication of just how much cryptocurrency is driven (mostly for the worse) by social media was provided by a survey published by the non-partisan NORC at the University of Chicago in July 2021. It found that 24% of cryptocurrency traders primarily receive their info regarding crypto from social media, with 26% informing themselves via crypto exchanges and 25% from more general trading platforms such as Fidelity and Robinhood.

If nothing else, this survey underlines just how poorly informed many traders are. Relying on social media is a recipe for disaster since posts spread through social media mostly because they reinforce what people already want to hear. Instead, traders really should endeavor to find more objective and impartial sources of information and conduct their own research via primary sources (e.g. company websites and white papers) and their own critical analysis.

Otherwise, traders can all-too-easily fall into the trap of following whatever the largest number of people are talking about on Twitter, Discord, Telegram, or whatever else. Almost needless to say, latching onto a cryptocurrency only after it has gone viral usually means that it has already reached the top. In other words, far too many people swayed by social media end up buying a cryptocurrency high, at which point it falls.

Another example of just how dangerously powerful social media is — if more proof were needed — can be found in the fact that around $770 million in losses from crypto-related social media scams were reported to the FTC in 2021. The takeaway: always step outside social media to pursue your own research.

2. Panic Selling

The flipside of FOMO (fear of missing out) and buying too high is panic selling. Admittedly, this is a harder error to avoid, if only because you may genuinely need to sell certain cryptocurrencies in certain circumstances, and differentiate (in a moment of fear) between a faddish token that’s actually in the process of dying and one that has a sustainable future ahead of it can be tricky.

One temptation many new traders have is to buy, say, $1,000 of a cryptocurrency, and then sell it quickly if it falls significantly lower, to something like $800 or under. Especially if you’re a risk-averse trader, you might be set on avoiding being significantly in the red at any moment whatsoever, and so would prefer to sell to limit losses.

However, this is really a good idea only if you’ve decided that the cryptocurrency you’ve invested in is never going to recover, and/or that you’re never going to buy it (or perhaps any other cryptocurrency) again. Conversely, if you could or do see yourself buying it again ‘when things pick up you’re setting yourself up to lose money. That’s because you’ll be replacing the same amount of cryptocurrency for less money (be it USD, EUR, or GBP), and then using this same quantity (or less) money to buy what will likely be the same cryptocurrency at a higher price.

Instead, it again really pays to do your own research and pick a cryptocurrency you really believe in. And ‘really believing in’ a cryptocurrency means sticking with it even when it dips and falls, since you expect that, in the long term, it will have a higher price than what you paid for it.

3. Making Too Many Trades

Strictly speaking, this error is a combination of FOMO and panic selling. Basically, some new traders have an unfortunate tendency to swing impulsively from one trade to another, led once again by social media buzz. What this means in practice is that holding one cryptocurrency, they sell it for another token in the hope of bigger gains, and then sell the second for a third one, and so on.

There’s never a guarantee that this approach will actually result in more profits for the trader. However, one thing it will guarantee is that they end up paying more exchange fees for each new transaction they make. And when you combine this with the possibility that they may exit one token at a loss, and exit another at yet another loss, you can easily imagine the kind of costs and losses that are compounded into one yellow snowball of failure.

Again, the trick for avoiding this is to set out from the very start with a clear idea of which are the fundamentally strongest cryptocurrencies and stick with them. Do not keep jumping bandwagons, and remember that the cryptocurrency sector is still very young, so even coins that are modestly rising now may be much higher in several years (so long as they’re fundamentally strong).

4. Keeping Holdings on Exchanges

This one isn’t a crypto trading mistake per se, yet it’s nonetheless one that many, many new traders make. Even though Bitcoin is well over ten years old and crypto-exchanges generate millions or billions in revenues each year, the latter is still hacked from time to time. Even Binance was hacked as recently as 2019, and with hacks costing around $4 billion in 2021, it’s never a good idea to keep significant sums of cryptocurrency on an exchange.

Of course, what counts as ‘significant’ varies from person to person, but a general rule of thumb is that, if you have more crypto on an exchange than you can afford to lose, then transfer it to your own hardware wallet. Even the best hardware wallets today are relatively inexpensive, but they provide a secure and simple way for you to take custody of your own cryptocurrencies. And given that they’re much more secure than pretty much all exchanges and Defi platforms, they’ll protect traders from any unfortunate and unexpected losses.

5. Making An Investment All At Once

Unless you bought bitcoin in 2010, it’s usually not a great idea to buy a large lump sum of the cryptocurrency and leave it at that. Now that bitcoin is relatively expensive — and also subject to semi-regular price swings — a more prudent method is to use dollar-cost averaging.

So rather than, for instance, buying $10,000 in ETH right now, it’s usually a better bet to spread this purchase over several months. By purchasing $1,000 or $2,000 of ETH at a time each month, you even out price fluctuations, balancing dips after purchases with rises. By contrast, with a single large purchase, you run the risk of buying too high and seeing an immediate drop afterward.

Bring Your Own Beer

The above pointer obviously doesn’t rule out picking a single cryptocurrency and sticking with your investment for the long term. It just means spreading out your purchase of this single cryptocurrency, so that you average outfalls and rises.

Indeed, choosing only a small handful of cryptocurrencies and HODLing them for the duration really is the golden rule of cryptocurrency investment. Once your own research has shown that a particular coin (or several coins) really is likely to appreciate in the coming years, the only rational course of action is to stick with them, regardless of what else happens.

Admittedly, new information may come to light that genuinely changes your fundamental picture of a cryptocurrency, but if it doesn’t, no amount of social media hype or bad media coverage should really change your perception.



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