Understanding Cryptocurrency Investment: Diversification, Risk Management, and Trading Bots
1 : Have a strategy for crypto trading
It isn’t easy to separate genuine cryptocurrency recommendations from the scams; there are lots of sharks out there waiting to take investor’s money.
Reports of crypto investment scams surged to 7,118 in the first nine months of 2021. This was up 30% on the whole of 2020, according to Action Fraud, with the average loss per victim at £20,500.
So when investors are confronted with a lot of information about a cryptocurrency, they should take a step back from the hype.
Try to look critically at the project or platform. How many users does it have? What problem does it solve? Avoid coins that promise the Earth but haven’t delivered anything tangible.
2. Manage risk
Some people offering crypto trading tips might not have their investor’s best interests at heart. So investors should be mindful not to get stung making the same mistakes as others.
Set limits on how much you invest in a particular digital currency and don’t be tempted to trade with more money than you can afford to lose.
Cryptocurrency trading is a high-risk business and more traders lose money than don’t.
We explain the highs and lows of the digital currency.
3. Diversify crypto portfolios
It may not pay to have too much invested in one single cryptocurrency. Or as they say: don’t put all your eggs in one basket.
As with stocks and shares, spread money out among different digital currencies.
This means less risk of being over-exposed should one of them plummet in value – especially as the market prices of these investments are highly volatile.
There are thousands to choose from, so investors should do research.
Find out about the alternatives to bitcoin.
Automate purchases
Just as with regular stocks and shares, it can help to automate crypto purchases to take advantage of pound-cost averaging.
Most cryptocurrency exchanges, including Coinbase and Gemini, allow investors to set up recurring buys.
This is where crypto investors tell the platform to purchase a fixed amount of their preferred cryptocurrency every month – for example, £100 worth of bitcoin. It means they get a bit less of the currency when prices are high, and a little more when prices are low.
That takes some of the stress out of trying to time the market by either buying a currency at what might be the lowest possible price or picking a high point to sell. It’s something that even market professionals struggle to get right.
5. Using trading bots
Trading bots can be useful in some circumstances, but they aren’t recommended for beginners looking for crypto investment tips. Often, they are just scams in disguise.
If real algorithm existed that timed people’s buy and sell trades to perfection, everyone would be using them!
Five common crypto mistakes
The latest research from UK regulator the Financial Conduct Authority showed that about 2.3m Brits own cryptocurrency in one form or another.
It’s very easy to get caught up in the hype of news headlines. Crypto mistakes are startlingly common, and below we list some of them.
1. Buying just because the price is low
Low prices do not always represent bargains. Sometimes prices are low for a reason! Investors should watch out for cryptocurrencies with falling user rates.
Often, too, developers leave a project and it stops getting properly updated, making the cryptocurrency insecure.
2. Going ‘all-in’
Some of the more suspect trading platforms suggest investors should maximise their money by betting as much as possible. This is a quick way to the poor house.
Better crypto investment tips would be to only use a certain proportion of investing capital — for example 5%. Being mindful to keep an emergency cash fund in an easy access savings account that never gets invested in the market could be wise.
3. Thinking crypto is ‘easy money’
There’s nothing easy about making money through trading any kind of financial asset, whether stocks and shares or commodities like silver and gold. The same can be said for cryptocurrency.
Anyone who says different is probably trying to trick investors into making crypto mistakes.
4. Forgetting the crypto keyphrase
For those who have a hardware wallet for storing their crypto offline, forgetting their keyphrase is like losing the keys to a bank vault.
Without the keyphrase, all their cryptos will be irretrievable.
5. Falling for scams
Investors should be very wary of crypto deals that sound too good to be true.
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Cryptocurrencies
Five cryptocurrency tips (and five mistakes to avoid)
Tom Rodgers
Updated February 14, 2024
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Important information
Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Read more
Some of the best trading tactics often come from years of investing in cryptocurrency markets.
With this guide beginners can learn some of the best trading strategies and avoid common cryptocurrency mistakes.
In this article, we will explain:
Five cryptocurrency tips and trading strategies
Five common cryptocurrency mistakes and how to avoid them
How to decipher crypto jargon
Related guides: Should you invest in bitcoin? and What is cryptocurrency?
Play Video
Six cryptocurrency tips
1. Have a strategy for crypto trading
It isn’t easy to separate genuine cryptocurrency recommendations from the scams; there are lots of sharks out there waiting to take investor’s money.
Reports of crypto investment scams surged to 7,118 in the first nine months of 2021. This was up 30% on the whole of 2020, according to Action Fraud, with the average loss per victim at £20,500.
So when investors are confronted with a lot of information about a cryptocurrency, they should take a step back from the hype.
Try to look critically at the project or platform. How many users does it have? What problem does it solve? Avoid coins that promise the Earth but haven’t delivered anything tangible.
2. Manage risk
Some people offering crypto trading tips might not have their investor’s best interests at heart. So investors should be mindful not to get stung making the same mistakes as others.
Set limits on how much you invest in a particular digital currency and don’t be tempted to trade with more money than you can afford to lose.
Cryptocurrency trading is a high-risk business and more traders lose money than don’t.
We explain the highs and lows of the digital currency.
3. Diversify crypto portfolios
It may not pay to have too much invested in one single cryptocurrency. Or as they say: don’t put all your eggs in one basket.
As with stocks and shares, spread money out among different digital currencies.
This means less risk of being over-exposed should one of them plummet in value – especially as the market prices of these investments are highly volatile.
There are thousands to choose from, so investors should do research.
Find out about the alternatives to bitcoin.
4. Automate purchases
Just as with regular stocks and shares, it can help to automate crypto purchases to take advantage of pound-cost averaging.
Most cryptocurrency exchanges, including Coinbase and Gemini, allow investors to set up recurring buys.
This is where crypto investors tell the platform to purchase a fixed amount of their preferred cryptocurrency every month – for example, £100 worth of bitcoin. It means they get a bit less of the currency when prices are high, and a little more when prices are low.
That takes some of the stress out of trying to time the market by either buying a currency at what might be the lowest possible price or picking a high point to sell. It’s something that even market professionals struggle to get right.
5. Using trading bots
Trading bots can be useful in some circumstances, but they aren’t recommended for beginners looking for crypto investment tips. Often, they are just scams in disguise.
If real algorithm existed that timed people’s buy and sell trades to perfection, everyone would be using them!
The market prices of cryptocurrencies are highly volatile
The market prices of cryptocurrencies are highly volatile
Five common crypto mistakes
The latest research from UK regulator the Financial Conduct Authority showed that about 2.3m Brits own cryptocurrency in one form or another.
It’s very easy to get caught up in the hype of news headlines. Crypto mistakes are startlingly common, and below we list some of them.
1. Buying just because the price is low
Low prices do not always represent bargains. Sometimes prices are low for a reason! Investors should watch out for cryptocurrencies with falling user rates.
Often, too, developers leave a project and it stops getting properly updated, making the cryptocurrency insecure.
2. Going ‘all-in’
Some of the more suspect trading platforms suggest investors should maximise their money by betting as much as possible. This is a quick way to the poor house.
Better crypto investment tips would be to only use a certain proportion of investing capital — for example 5%. Being mindful to keep an emergency cash fund in an easy access savings account that never gets invested in the market could be wise.
3. Thinking crypto is ‘easy money’
There’s nothing easy about making money through trading any kind of financial asset, whether stocks and shares or commodities like silver and gold. The same can be said for cryptocurrency.
Anyone who says different is probably trying to trick investors into making crypto mistakes.
4. Forgetting the crypto keyphrase
For those who have a hardware wallet for storing their crypto offline, forgetting their keyphrase is like losing the keys to a bank vault.
Without the keyphrase, all their cryptos will be irretrievable.
5. Falling for scams
Investors should be very wary of crypto deals that sound too good to be true. We outline four common crypto scams for investors to be careful of:
Cloud multiplier scams
Fraudsters sometimes contact victims by email or text with an “investment opportunity”. They promise to give investors double or triple the amount they have put into bitcoin if they send their cryptocurrency to a particular digital wallet.
REMEMBER: Offers of free money should always be viewed with great scepticism
Pump and dump
Criminals can easily inflate or deflate the price of very small or unknown cryptocurrencies, sometimes sending the value of these currencies skyrocketing.
Sometimes criminals will own a lot of a particular cryptocurrency (through pre-mining much of it before it is available to the general public).
When unwitting traders rush in to try and grab a piece of the action, the criminals wait for the price to increase before selling all their coins and causing the price to crash.
They can pump up the price by promoting it on social media, before selling it at the higher price.
Malicious wallet software
We believe the best crypto tips will tell investors to stick with big name crypto wallets, such as Ledger, Trezor, Exodus or MetaMask.
Dodgy or unknown wallets that investors might find on Google Play or the App Store could be scams to steal crypto funds with dodgy code.
Fake coins
With so many cryptocurrencies on the market, it can be difficult to tell what’s real and what’s not.
When investing in fake coins, criminals can steal the investor’s identity and often their hard-earned money.
We believe investors should not take anyone else’s word for it and use as many sources as possible to do their own research on coins before they buy them.
Bitcoin is the original digital currency, and remains the most popular
Knowing the crypto lingo
There is a lot of jargon out there in crypto land and often it can be difficult to decipher.
Use this helpful list to make the most of what we believe to be the best crypto tips and dodge common cryptocurrency mistakes that could blow up an investor’s trading account.
Altcoin: a portmanteau of “alternative” and “coin”, altcoin refers to any cryptocurrency other than the original one, bitcoin.
Cryptocurrency exchanges: just like regular stock exchanges, the likes of Coinbase and Gemini allow traders and investors to buy and sell — except that here they are trading cryptocurrencies. Unlike standard stock markets, cryptocurrency exchanges are online-only and are open 24 hours a day, seven days a week.
Limits: most exchanges do not set limits or restrictions on the number of cryptocurrency trades their users can make in a day. On turbulent trading days, when cryptocurrency prices are moving up or down very quickly, some brokers may put a short-term halt on people depositing funds on their platforms.
Market cap: the total value of a cryptocurrency. It’s calculated by multiplying the price of a cryptocurrency by the total number of its coins in circulation. It’s a useful measure for comparing the total value or size of different cryptocurrencies.
Shorting: “shorting” cryptocurrency means betting on the price going down rather than up.
Forks: a cryptocurrency fork is a split in a blockchain where two separate blockchains are created. This is sometimes because of a disagreement between developers as to how the blockchain should be organised. In 2017, bitcoin forked into two separate blockchains: bitcoin and bitcoin cash.
ICO: this is an initial coin offering where new cryptos are sold to investors for the first time. It’s similar to an initial public offering (IPO) in the stocks and shares world.
Margin trading: when platforms talk about margin trading, they mean investors borrow money to increase their bet on a cryptocurrency. Margin trading can dramatically exacerbate losses.
Fiat: a fiat currency is one that is backed by a sovereign government. For instance, sterling, US dollars or Indian rupees.
Cloud mining: people can “mine”, or create, cryptocurrencies to compete for rewards in the form of newly minted crypto. Cloud mining uses remote data centres with shared processing power, like the kind that powers Google software, to pool resources and cut the cost of mining.
Be extremely wary, as many cloud mining companies are just scams. An incredible amount of computing power is needed to mine the top cryptocurrencies. Anyone offering easy cloud-mining rewards is likely to be a charlatan.
Bull markets and bear markets: these are phrases borrowed from traditional stock markets. A bull market means traders are confident in the prospects for a particular investment, meaning they will keep buying and prices will keep rising – whereas in a bear market, traders are nervous and prices will generally fall.
Sell orders: a sell order is an instruction given by traders to a platform to sell cryptocurrency that they own when the price hits a certain level. In traditional markets, this is referred to as a “stop loss”.
