In light of last year's explosive growth of the crypto market, there are plenty of investors willingly sharing their stories about how they got rich overnight by investing in a new cryptocurrency or another promising ICO. In such a volatile market, however, the reverse happens more often as inexperienced investors lose all of their investments. We examined five of the most likely scenarios whereby the crypto market players are left empty-handed.
They Did Not Study the Cryptos and Crypto Market
If you do not conduct a fundamental and technical analysis of cryptocurrencies and rely only on intuition or recommendations in a chat from a user with a name like @BitcoinBillionaire, you can lose your investments in the shortest possible time.
For example, last week, on March 5, the rate of the Ripple cryptocurrency grew by almost 20% and reached $1.08. This happened on the background of news about the successful testing of cross-border payments based on the Ripple technology by South Korean Woori Bank, as well as rumors about the imminent addition of the cryptocurrency to the listing of the Coinbase crypto exchange. On March 7, however, the crypto exchange denied this information; as a result, the exchange rate of the cryptocurrency fell by 14% to $0.92. Those who entered at the maximum, believing only in rumors, now have to wait for another wave of positive news to at least break even.
New investors and traders, who do not want to conduct a proper analysis of the cryptocurrency market, but only make decisions based on recent events, can invest in assets at the time of the growth and sell them at the time of the fall, thereby incurring losses. According to the crypto investor Rishabh Baldi, on average, if a new investor plans to enter this highly volatile market, then in the first three to four months they should be ready to spend five to six hours studying the market, players, cryptocurrency, and cases. According to the investor, in a year of careful analysis and good planning of investment strategies, you can increase the size of your deposits by 1,000% to 3,000%.
The Naive Think They Can Get Rich Quickly on Cryptocurrencies
Crypto trader Peter McCormack analyzed the situation on the crypto market and came to the conclusion that many new crypto enthusiasts come to the market with absolute certainty that they will be able to get rich quickly. According to McCormack, this leads not only to disappointment but also to a rapid loss of funds.
Naturally, when the market is experiencing a take-off, many new investors enter it, hoping to get an easy profit. Moreover, they write about it in all the news, and those who manage to make a good profit, tell their success stories. That is how bubbles are born, and it happened with the dotcom bubble, and the same was with the 2008 housing bubble.
The crypto market does not offer instant earnings. This is a speculative market, in which some players were able to get rich quickly. Many quickly lost all their investments. The crypto market, like any other market, is cyclical, which means that after a period of growth, the fall period will necessarily come. As it happened in 2013, and the general graph of the crypto market shows that this period looks like a moment of small growth followed by an insignificant drop.
In fact, in November 2013, the capitalization of the crypto market grew rapidly against the backdrop of the arrival of new players who bought into Bitcoin, the revolutionary new money of the future. So, by December 4, 2013, the figure reached its first maximum of $15.7 billion. And by December 19, the capitalization fell sharply—more than twofold—to $6.9 billion. The crypto market took more than two years to recover and reach past highs.
This situation may repeat, even though today the market for cryptocurrencies is very different from what we saw in 2013, as players have more information on it, and the ecosystem is rapidly developing and finding new uses. Nevertheless, this is a speculative market that can collapse at any moment. Of course, there are examples of how you can get rich quickly on it; however, the chances of losing investments in full due to poorly planned investment strategies are many times higher.
Neglected Security Measures
Investing in cryptocurrencies is associated with high risks because of the presence of a large number of scammers who use various methods of attacks to obtain the crypto savings of investors. According to crypto trader Peter McCormack, attacks on crypto wallets are committed daily. Exchanges are also subject to constant attacks. Investor Cody Brown recently wrote an article about how the attackers got access to his account at the Coinbase exchange and withdrew about $8,000 within 15 minutes. Each owner of a cryptocurrency wallet must be aware of potential threats and observe all precautions when working with cryptocurrencies:
Choose how to store a cryptocurrency. It is best to use cold storage and have its backup;
Use two-factor user authentication;
Install a reliable anti-virus program;
Never disclose your private key;
Always check the addresses of wallets and links;
Have a reliable system of passwords and seed phrases.
It is also worth keeping your passwords and seed phrases in a safe place; otherwise one is likely to meet the fate of Mark Frauenfelder, who nearly lost his Bitcoins worth more than $32,000 in 2017. And all because he lost a sheet of paper with a password of 24 words for a cold wallet. Realizing that he could not remember the PIN code to the wallet, he was horrified by the realization that he was not able to get his cryptocurrencies in any way. Frauenfelder appealed to the technical support of the crypto wallet developer, wrote on forums, searched for ways to hack it, and even turned to a hypnosis specialist, but all this yielded nothing. As a result, he was helped by a young hacker, who wrote an instruction on how to crack the software to a cold wallet. Still, it cost him many months of stress, money, and fees on the hacker for recovering the password and the seed phrase.
Selling Crypto Assets Too Early
One of the early investors in Bitcoin, known as SuperDuperDerp, told on Reddit how he invested in the cryptocurrency back in 2012 when it cost $4. For $400, he bought 100 BTC. Despite the fact that he instantly delved into the topic of the crypto market and knew that Bitcoin would cost a lot of money, he could not keep his assets for a long time. The reason was financial difficulties, as well as a weak growth of the cryptocurrency. Therefore, when the Bitcoin rate doubled and reached the $8 mark, he decided to sell his assets, hoping that the exchange rate would collapse and he would be able to re-enter at a low price.
But that did not happen. As the investor writes:
"I watched it climb and climb until I finally bought back in around $100, netting me 8 BTC. I let my feelings get the best of me and panic sold/bought a few times during the 2013 turmoil, and most recently had to sell a few BTC as I was in dire straights. Now I have a little over 2 BTC and am marginally better off than I was in 2012. I like to believe that if I had been financially comfortable in 2012, I would have bought a chunk of BTC to save long-term and wouldn't have been so quick to sell. But who knows? It takes money to make money."
According to Brian Kelly, the co-founder of BK Capital Management and the author of the book The Bitcoin Big Bang: How Alternative Currencies Are About to Change the World, in order to stay in the black, three simple rules must be observed:
Start small. Since cryptocurrencies are still quite a new technology, and the market is extremely volatile, the optimal investment size should be from 1% to 5%.
Do not sell too fast, even if the investment has grown by 20% or 30%.
Do not panic as cryptocurrencies are extremely unstable, and their rates can vary from 20% to 50% in one day.
They Engage in Marginal Trading
Marginal trading is one of the most profitable, but at the same time, one of the riskiest strategies for crypto traders. This strategy is suitable only for experienced players who are ready to incur large financial losses.
In margin trading, a crypto trader takes a loan from a broker, most often an exchange, by providing the amount of collateral, or the margin. At the same time, interest is charged for using the loan. Thus, a crypto trader can invest in a cryptocurrency in excess of the balance.
There are two main options with margin trading—a long position, or a game of rising stakes, when the trader bets on that the crypto asset will grow in price, and a short position, or a game of stakes on drops, when the bet is placed on the decrease in the price of a cryptocurrency. If the price of a crypto asset seriously goes down while trading on the rise, then when it reaches a certain critical point, the trader can lose their whole deposit due to the margin call, or the forced closure of the position by the broker in case the trader has not added funds to the account. If the borrowed funds are under threat, the exchange has the right to deduct the loss from the deposit of the trader's margin account.
There are cases when traders, who had to face serious losses for the first time, decided to raise the stakes and win back their positions instead of accepting their losses. This often leads to even greater losses.