How Do You Avoid Losing Money in Crypto?

Just as you invest $100 and gain about $1000 within months, you can also lose it at a go. Cryptocurrency can make you rich quickly, but it can also empty your wallet before you know what hit you. 

While many people dream of becoming crypto millionaires, the reality is that many newcomers lose their money due to simple mistakes and a lack of knowledge.

The good news is that you can protect yourself from many common crypto pitfalls. Let’s look at some practical ways to avoid losing your hard-earned cash in the crypto market, but first, let’s discuss how investors tend to lose money.

Read Also: How to Report Cryptocurrency Losses on Taxes

Key Takeaways

• Stick to well-established cryptocurrencies like Bitcoin and Ethereum rather than speculative altcoins.
• Use self-custody solutions like hardware wallets to securely store your crypto and reduce counterparty risk.
• Beware of get-rich-quick crypto schemes and unrealistic promises of huge returns.
• Practice dollar-cost averaging to smooth out market volatility rather than trying to time the market.
• Limit your crypto exposure to no more than 5% of your overall investment portfolio.

5 Ways Investors Lose All Their Money in Crypto

Here are the ways investors lose their money to crypto: 

Using Sketchy Exchanges

This mostly happens to the newbies in crypto. Most of them feel shy or don’t see the need to ask experts for guidance on picking the right exchanges. Instead, they get caught up in the excitement of finding a new, obscure exchange that offers attractive deals on lesser-known coins.

The scammers set up fake trading dashboards on these fake exchanges, making it appear as though the victims are making profitable trades. However, when the victims try to cash out their crypto, the scammers simply disappear, leaving the victims with nothing.

The lesson here is that investors, especially those new to crypto, should be very cautious about using obscure or unfamiliar exchanges. It’s always best to stick to well-known and reputable platforms like Coinbase or UEEx, as recommended by experienced investors. 

Neglecting Proper Security Measures

Not taking the proper security measures is a fast way to lose all your investment in cryptocurrency. Hackers can easily steal your funds if you don’t set up strong authentication methods and safely store your private keys.

For example, if you only use email and phone number authentication, hackers can trick your phone provider into transferring your SIM card to their control. Then they can easily reset your passwords and drain your accounts. 

Similarly, if you don’t properly store your private keys, they can be lost or stolen. Saving them in a text file on your computer or cloud storage puts them at risk of being accessed by hackers. Even seemingly safe methods like writing them down on paper can lead to them being accidentally destroyed or misplaced.

Falling for Pump-and-Dump Schemes

These schemes work by getting famous people or influencers to heavily promote a cryptocurrency, which causes the price to go up quickly. Once the price is high, the people behind the scheme sell off their holdings, causing the price to crash. This leaves regular investors with big losses.

In the SafeMoon example, celebrities like Nick Carter and Soulja Boy told their fans to buy the token, promising big returns. But once the price went up, the insiders cashed out, and the price plummeted, leaving many everyday investors with nothing. 

This shows how important it is for people to be very careful about investing in cryptocurrencies that are being heavily promoted, especially by celebrities or social media stars. It’s often a sign that the promoters are just trying to make money at the expense of regular investors.

Overestimating Trading Abilities

You probably paid for those IG crypto classes and feel like you know it all. But the truth is, that even the best traders and investors struggle to consistently profit from the volatile cryptocurrency market. The problem is that you’re overestimating your trading abilities.

Just because you’ve seen some lucky traders make big gains, doesn’t mean you can replicate their success. When you try to compete with these sophisticated traders, you’re likely to end up losing a lot of money. 

The market is just too unpredictable and fast-moving for the average person to reliably make money through active trading. Even if you do manage to time a few good trades, it’s easy to give those gains right back when the market turns against you.

Overlooking Tax Obligations

Neglecting taxes is like telling the government you want a front-row seat to financial trouble. In the case of the crypto investor, overlooking their tax obligations proved to be a costly mistake. 

For example, an investor had traded cryptocurrency extensively, unaware that each trade was considered a taxable event. When the accountant revealed this surprise, the investor was faced with a hefty tax bill, amounting to 30% of the value of all trades they had made. 

This unexpected tax burden, combined with the 90% of crypto assets they had lost while trading, left the investor in a precarious financial situation.

The lesson here is clear: Ignoring these responsibilities can lead to severe financial consequences, as this investor discovered the hard way.

How To Avoid Losing Money in Crypto

Here are some key strategies to avoid losing money in cryptocurrency:

Don’t Invest Money You Can’t Afford to Lose

The golden rule in crypto trading is to never invest the money you need for essential things like bills, rent, or emergencies. Only use money you’re completely okay with losing. 

A good practice is to limit your crypto investments to no more than 5% of your total wealth. This way, even if things go wrong, your daily life won’t be affected.

Use Smart Storage Solutions

Keep your wallet information private and secure. Never share your private keys or wallet addresses publicly, especially on social media. 

Consider using reliable cryptocurrency custodians for large holdings, and implement security measures like two-factor authentication. 

Store your recovery phrases in secure physical locations, not digitally, and use unique passwords for all your accounts.

Diversify Your Portfolio

Don’t put all your eggs in one basket. Spread your investments across different cryptocurrencies instead of focusing on just one. 

This way, if one cryptocurrency drops in value, your entire investment isn’t at risk. 

However, don’t forget to maintain some investment in major cryptocurrencies like Bitcoin, as they tend to be more stable and have proven their durability over time.

Use Stop Losses Every Time

Professional traders always use stop losses – it’s not optional, it’s necessary. A stop loss is like an emergency brake that automatically sells your cryptocurrency if it falls below a certain price. 

This helps limit your potential losses and removes emotional decision-making from the equation. Set your stop loss at a level you’re comfortable with, typically around 10% below your entry price.

Don’t Chase Rising Prices

Avoid buying just because you see prices going up rapidly. This is called “FOMO” (Fear Of Missing Out) and often leads to buying at peak prices right before a drop. 

Instead, do your research and make informed decisions based on fundamentals, not emotions. 

Look at factors like the project’s real-world use, technical specifications, development team, and community involvement.

Use Dollar-Cost Averaging

Instead of trying to time the market perfectly, consider using dollar-cost averaging. This means investing a fixed amount regularly (weekly or monthly) regardless of the price. 

This strategy helps reduce the impact of market volatility and prevents emotional decision-making. You can automate this process through exchanges to make it easier.

Understand Tax Implications

Be aware that cryptocurrency trades are taxable events. Keep track of your trades and understand how long you’ve held each cryptocurrency, as this affects your tax rate. Short-term gains (held for less than a year) are typically taxed at a higher rate than long-term gains.

Stay Away From Leverage Trading

Unless you’re a highly experienced trader, avoid using leverage (borrowed money). While it might seem tempting to multiply your potential gains, it also multiplies your potential losses and can quickly wipe out your investment. Stick to trading with your own money until you’ve gained significant experience.

Treat Trading Like a Business

Keep detailed records of all your trades, including entry and exit points, profits, and losses. Use a trading journal to track your performance and learn from your mistakes. 

Understanding that losses are part of the business helps you stay objective and focused on long-term success rather than short-term gains.

Do Your Research on New Projects

Before investing in any new cryptocurrency or ICO (Initial Coin Offering), thoroughly research the project. 

Look at the team behind it, read the whitepaper, and understand the technology and its potential real-world applications. 

Be especially cautious of projects that seem too good to be true or lack solid fundamentals.

Read Also: Cryptocurrency Insurance: Protecting Digital Assets From Risks

Conclusion

Don’t be a victim of crypto losses. Protect your investments by sticking to reliable cryptocurrencies, using secure storage, avoiding get-rich-quick schemes, and diversifying your portfolio. 

Stay vigilant against scams, and you’ll be well on your way to building wealth in the crypto market. Remember, slow and steady wins the race when it comes to cryptocurrency investing.

Frequently Asked Questions