Dear community,
as I have stated in my recent article of the Financial Goals 2021 initiative, I have shredded ~5 ETH worth of crypto during the last bull run, or rather during its downfall.
Since we might be nearing that situation again in the beginning of 2021 I though it might be a good idea to share the mistakes I have made and how to avoid them to those new to crypto.
Diversifying your Portfolio
Diversifying your portfolio is one of the first lessons you are taught when you start trading stocks. The more stocks from different industries you own, the more unlikely it becomes that all of them will fail. As my personal portfolio has shown this year, even when the airlines and airports do not pay out any dividends, the other industries made up quite nicely for it. Had I invested only in airlines and airports, well, I would be in serious trouble.
It seems natural to want to apply this basic strategy also to the world of crypto investing. You shouldn't however! Truth is that you cannot really(!) diversify your portfolio with holding different crypto tokens. This would be like trying to differentiate your stock depot by buying both Exxon Mobile and Royal Dutch Shell. When the gas market goes down, both do suffer.
Likewise with crypto. One company, or coin to take the crypto glasses back on, may perform better than the other but they are both bound to the same fate.
Don't get me wrong. If you believe in two crypto projects, go ahead and buy them. But don't do it for the matter of diversification. The better choice for a beginner would be to buy Bitcoin, maybe sprinkle it with Ethereum, and nothing else.
Trading
On the stock market 90% of traders fail to be profitable. I have not seen any similar statistics for crypto, but I am sure that the numbers are close. It seems tempting to swap ETH to another alt coin, wait for it to rise in price and then swap it back to more ETH. But more often than not this is easier said then done.
The problem I encountered while trying this was that not only does the other alt coin have to perform well, it must also perform better than ETH for this to work. However, ETH most likely is the more stable coin of the two, so as soon as the charts shift downwards you would have a problem. And as mentioned before if both go upward, but ETH goes upwards faster you will also end up in a less ideal situation.
.jpg)
After learning that lesson the hard way, my advice would be to buy the coins you believe in and hold them. If you want to earn, choose a safer way like dividend coins (NEO for example which pays its holders GAS. Or KCS which pays a dividend from KuCoin's profit.). You may also use the savings products from exchanges like Binance which pay a small but constant yield.
Transferring Coins to your Wallet
Not that this is a mistake per se, but I want to note that the 'move everything to your own wallet, exchanges are unsafe' advice is to be taken with a grain of salt. While it is true that in the original idea of blockchain you should store your assets behind your own key, in reality this privilege of being the true owner of the coins can be costly.
Exchanges charge fees for transferring crypto out of their accounts, these fees are usually even higher then the exorbitant network fees that one has to pay when the networks are full (which during a bull-run, they usually are). This will greatly diminish your margin, especially since you cannot earn interest on crypto sitting in your wallet. Should you think about trading (don't) you would have to transfer it back to the exchange once more and pay another miner with a gas or network fee. Every roundtrip will make your balance melt away.
This can not be seen black and white as of course for somebody holding large amounts of money in, let's say BTC and who just want to HODL it for the next ten years, than apparently their own wallet is the more reasonable holding option than a foreign-led exchange. However, for the average trader with 500-2000 USD worth of crypto in different coins, the costs for transferring their funds will be hard bite to chew.
We have all heard of scary stories about bankrupt exchanges, but let us also emphasize that Binance has already proven their ability to recover from huge losses without any effect on their user base.
Conclusion
Keep your itchy finger steady! While some may be enormously lucky in this game, others will learn that more often then not, when they move crypto around (no matter whether exchanged for other coins or transferred to other wallets), they will lose money with the transfer rather than gain any. Buy into few select projects and hold on to them to ride the blockchain train as safely as possible.
Disclaimer: No financial advice included in this article. Just my personal experience. Do your own research!
Some links in the post are referral links. Feel free to use other sign-up methods
Images courtesy of Unsplash.com
Posted Using LeoFinance Beta
Great points you have there, but the one about storing it in your own wallet I would like to mention it really depends on how much you hold in the exchange. 5 ETH on an exchange probably okay but if its 500 or more, I doubt I can sleep easy knowing the coins are in an exchange if I am not trading it. Like you mention its easy in hindsight to know what was a good trade, but having just kept the crypto in your own controlled wallet and hold long term would likely yield multiples folds. Similar to the approach of putting money in my 401k or IRA and forget about it until I retire. Thanks!
Agreed, I tried to express that in the last paragraph - maybe I should have put it at a more prominent space and not below the last picture :D
"This can not be seen black and white as of course for somebody holding large amounts of money in, let's say BTC and who just want to HODL it for the next ten years, than apparently their own wallet is the more reasonable holding option than a foreign-led exchange. However, for the average trader with 500-2000 USD worth of crypto in different coins, the costs for transferring their funds will be hard bite to chew."
Can’t agree more, trading (crypto or anything else) is not easy money, despite all the lambo YouTube trader are trying to make you believe.
Posted Using LeoFinance Beta