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Common Mistakes Of Retail Crypto Investors And How To Avoid Them
14 March 2019 15:04, UTC
By Richard Shibi
The events of the past years in the crypto industry clearly depicted the weaknesses of the retail investors, which were lucky or smart enough to obtain the digital assets — but their investing skills proved to fail them as they lost their funds gradually. In this article, I will focus on retail investors’ common mistakes within the Blockchain / ICO / STO sphere and how to avoid them.
According to Investopedia, “a retail investor, also known as an individual investor, is a non-professional investor who buys and sells securities, mutual funds or exchange-traded funds (ETFs) through traditional or online brokerage firms or savings accounts.” This category of investors seems to be the most vulnerable to scams, phishing attacks, identity theft, etc. That is mostly due to lack of experience or proper education in the investment field and due diligence on new ventures.
The list of the most common mistakes that retail investors make
Misunderstanding of the economic drivers of the underlying asset. Most retail investors lack the understanding of what actually drives the price of a particular asset up or down. Of course, there is no fixed formula, but there is a set of market indicators like regulation, scalability, adoption, technology, etc. It influences the price of a relatively new asset class like blockchain-based or crypto start-ups.
Ignoring proper analysis and due diligence. This situation usually leads to scam projects raising staggering amounts of money and easily running away with almost no trace behind.
Get social media influenced. Social media highly influence retail investors; if they read an article published by a crypto influencer, they will easily take the advise and follow track. Pump & dump scammers have widely used such techniques.
Follow herd mentality. Usually, retail investors are highly influenced by what everybody else is investing in. Imagine a scam ICO hiring the best YouTubers and media influencers to gain initial traction. Once that is done, the network effect will kick in, and thousands of retail investors follow the herd.
“FOJI” and “FOMO”. This is the Fear Of Joining In which happens at an early stage where an investment opportunity starts to show signs of appreciation, but the investor is afraid of joining in for it not to be a false signal. In most of the cases, this leads to missing out great opportunities and losing the considerable potential of asset appreciation, where the investor will either miss the deal or join too late when the price has already peaked, which is caused by FOMO — the Fear Of Missing Out. Retail investors are vulnerable to such fear, which will only add fuel to the fire and cause others to join in without conducting any due diligence.
Greed. Happens when someone has an entry plan, makes good money, but has no exit plan for the investment. It’s a belief that since the investment has made 30% for the last 2 or 3 months, it will continue to appreciate forever. Eventually, the asset gets overpriced very quickly, and institutional investors cash out huge profits from the overpriced asset. That usually leads to market correction which leads to fear.
Fear. The opposite of greed which usually leads to market collapse and oversold state of assets. It happens when an investment makes a loss which leads to so many retail investors closing their position on huge unjustified losses causing a domino effect on the asset. After that, institutional investors step into scope from the undervalued assets and reinforce their portfolios.
Market Timing. This is the worst enemy of retail investors. I have never met a professional who has ever tried to time the market since they know from experience that timing the market is absolutely like guessing the lottery numbers.
Selling winning positions too early and holding on losing ones for too long. We are hardwired not to realize a losing position by exiting with a drop, to the contrary, many investors will add to a losing position to minimize the loss, which eventually leads to a more significant loss while they sell a winning position way too early to realize some profit.
Tips to avoid mistakes
Get yourself familiar with the asset class you are trying to invest in. After all, investing in Bitcoin is very different from investing in an ICO utility token which is different from investing in security tokens, which is also different from obtaining shares in a blockchain start-up. You definitely don’t need a Masters in Finance or Economy, but getting yourself familiar with the differences between all available options, advantages and disadvantages will surely increase your chance to make the right investment decision.
There are many online courses about blockchain technology, as well as plenty of books and articles written by professionals which can help you get acquainted both with the technology itself, as well as the market dynamics. There is no fast track to securing a great deal — it is a matter of how much time and effort you spend on educating yourself before stepping into a new venture. To avoid falling into a scam, you should verify the following:
The CxO Team:
How does their LinkedIn profile look like? Has it been recently created?
Do their skills have zero endorsements? Do they claim that they have 20 years of experience and suddenly not able to create a presentable profile?
Have they passed KYC on many ICO/STO listing websites?
Are they reachable if you want to talk to them? Will they agree to show up on a video call?
Is the company info available online? Does it really belong to the team?
Is it registered in safe jurisdiction?
If you are planning to invest a serious amount of money, then will they be willing to disclose personal and company details?
The project documentation:
Does it have enough details about the actual solution or it covers only generic and obvious info which anyone can put together?
Are they able to answer challenging questions related to the solution architecture?
Business Model? Revenue Streams? Competition? Key Business Differentiators? Etc…
Do they have an MVP? Or maybe better an Alpha or Beta version?
Do they have inhouse development team for at least several months?
Real entrepreneurs know their business and market very deeply and very well, while scammers can hardly explain the content of their own. Avoid projects which are backed up by celebrities and focus more on projects which are backed up by market makers and serial entrepreneurs with the verifiable track record of high performance.
Define your strategy
Before you open any new position or make any investment, you should define an entry strategy and an exit strategy. Are you investing long term? If yes, then will you sell if the market goes down 20%? Or, will you sell if the market goes up 30%? Make sure that you stick to the original plan that you have. If you are a long-term believer, then the decrease in price is an excellent opportunity to reinforce the portfolio, while if you are a short-term trader, you better cut the losses short before it gets impossible to exit the position without committing huge ones. Lastly, if you are willing to absorb a maximum of 5% loss for each trade then make sure that you also allow at least 5% upwards before you take the profit. Know your emotional weaknesses; this is the best way to avoid falling into the trap of Fear, Greed, FOMO, FOJI, and others.
I advise all retail investors to gain more knowledge about new ventures they would like to get involved in. Some exchanges offer a demo account with which investors can experiment. This means that instead of using real assets, you can trial with fictitious money, where you can still buy and sell instruments, and incur profits and losses based on the actual market behavior. Never rush to invest! If you find an investment where you either invest now or you lose it, then most probably you will lose anyway. Real investments yield profit for the long term; there is no such thing that if you don’t join now, it will be too late forever. Remember, those who bought crypto in December 2017 are at a worse position than those who joined a year later when the market showed signs of forming a floor.
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