Remember when people did not believe in Bitcoin and everyone thought it would fizzle out? We were all waiting for the moment when we would be able to tell everyone “I told you so” once Bitcoin took off. However, as soon as it took off it seemed like everyone wants a piece of Bitcoin, and it makes us wish we could go back to 5 years ago sometimes! At first the world of cryptocurrency was full of tech enthusiasts and smart investors who saw Bitcoin’s potential.
Once Bitcoin went mainstream and the news started covering it all the time a lot of people who have no idea about technology or investing are aboard the Bitcoin ship. The problem is that their lack of knowledge about technology behind cryptocurrencies and investing leads to them making dangerous mistakes. If you are a new investor you need to avoid doing these things unless you like losing all your money.
1) Putting all your money in Bitcoin or some other cryptocurrency
This is the single biggest mistake that you can make. We know how this happens. People hear from Bitcoin from their friends or on social media websites. They start reading about it and get excited. Decide that this is how they are going to become rich and put all of their savings into Bitcoin or some other coin.
This isn’t just bad cryptocurrency investing, this is bad investing in general. You should NEVER bet it all on one thing. Imagine you being wrong and losing all of your savings. We aren’t saying that Bitcoin will fail and there are no indications that it will fail, but you should still not put all of your savings into it. You need to diversify your investments to make sure that one mistake doesn’t ends up making you broke. You shouldn’t bet everything on a single technology or even a single industry if you want to succeed as an investor.
2) Investing in a completely new coin
There are a lot of new coins being launched every month now, and a lot of people are going to lose money on them. People look at the prices of Bitcoin and realize that they missed the starting gun on it. They think that they can just hop onto another coin that just launched and get the same type of returns. They think that since Bitcoin skyrocketed in price, the other coin will do the same.
Here’s something we all need to come to terms with; Bitcoin was a once in a lifetime investment opportunity and we all missed it. We can still invest in Bitcoin or other cryptocurrencies to make a profit but we have to be realistic about what we are going to get in return. Bitcoin going up more than 80,000% was something no one could have predicted and it is something happens once or twice in a century. Lightning doesn’t strike twice though, so don’t expect it to happen again.
3) Not understanding difference between ICOs and cryptocurrencies
A lot of initial coin offerings are being announced these days. The problem is that people are buying these coins thinking that they are similar to Bitcoin when the reality is very different. Most of these ICOs are happening on the Ethereum platform, which is indeed a blockchain based platform like Bitcoin. However, these coins are not cryptocurrencies because they aren’t meant to be currency at all.
An ICO is the cryptocurrency equivalent of an IPO. Bitcoin is a currency and its value depends on market demand. ICOs are for selling shared in the company, not currency. The price of the coins you buy through an ICO will be determined not directly by demand for the coin, but the performance of the company. So if you buy coins in an ICO and the company fails to make money your coins will be worthless.
ICOs are a great way to make money but you need to treat them like IPOs. You need to look at the business model of the company launching the coin and then decide whether it is a worthy investment. Don’t just look at how many people want to buy the coin right now – there are many hyped companies which end up crashing and burning. Look at the business potential. Do you truly think that the company will end up making a lot of money? If yes then you should continue. If you don’t think so or aren’t sure then simply stay away from the ICO.
4) Ignoring blockchain companies
So you want to get a high rate of return, the type that early investors in Bitcoin got? There is one possible way to do it, though it may not be directly related to cryptocurrency. You need to invest in companies developing blockchain technologies. Blockchain is going to revolutionize data storage and security and it is still in the nascent stages. You can almost guarantee that in a few years blockchain will have a Unicorn or two. For those who aren’t aware, a Unicorn is company that is evaluated above a billion US dollars. Called a Unicorn because they are so rare that they are almost mythical.
Right now there are no successful blockchain companies because it is a nascent industry. Ethereum has made it easy to create products with the blockchain and there are many companies popping up. Some of these are getting funding through ICOs, some have angel investors, and some are going the IPO route. You need to look at the companies that are making announcements related to blockchain and see which one seems to have the most potential. We’d recommending dividing you investment between different companies to hedge your bets.
These are just some of the things you need to keep in mind when investing your money in cryptocurrency. The gold rush days of Bitcoin where everyone could become rich are over, it isn’t easy to make a lot of money now. You need to be smart and informed about your investments.