Trading Bitcoin and crypto is similar to traditional stocks but comes with far greater risk and a few other important caveats every trader should know.
We have all heard hundreds of stories about the life-changing money being made in the crypto space. Anonymous Twitter traders regale us with tales of turning $1,000 into millions in a matter of months, flipping altcoins and making 100x on investments daily.
Moon. Lambo. To the outside observer, this seems like an easy and sure way to get rich quick. They leave their jobs to become “professional crypto traders,” even before learning the basics of trading and managing risk. We all know how this story ends.
Being a trader in any market is hard — 95% of all traders fail, most within a few months. They generally go completely broke or perform far worse than simply investing a lump sum in a safe investment and leaving it to grow. Contrary to popular belief, the crypto market is the most difficult to trade for beginners for a number of reasons.
The casino never closes
The market is open 24/7, giving traders the feeling that they always have to be trading. This causes tremendous fatigue and FOMO (fear of missing out) for emotional traders. Nobody can effectively track a market that is perpetually available, and new traders find it difficult to step away. This often ruins both their personal lives and destroys their finances.
The crypto market lacks fundamentals, the cornerstone of trading legacy markets. When purchasing stock, a trader can review quarterly earnings, sales reports, the company’s road map and countless other barometers of success. More importantly, companies trading on the stock exchange are regulated and therefore transparent — you generally know what you are buying.
The strength of a team or project in crypto is nearly irrelevant for a trader’s purposes. Traders rely on technical analysis, which is hard to use properly for newcomers to the space.
I’m making money, so why is my Bitcoin balance down?
The interplay between Bitcoin
and altcoins adds a complicated wrinkle. Alts are rarely safe to trade and finding opportunities requires tremendous patience and experience — both things that newer traders inherently lack. New traders often mistakenly gauge the success of their trades in the USD value of the coin, not realizing that leaving their capital parked in Bitcoin would have been a far more profitable (and far easier!) strategy. Trading legacy markets with fiat is straightforward — you either make or lose dollars.
How do I set up a stop loss and take profit order?
Legacy traders have the benefit of placing both stops losses and take profit orders, as well as trailing stops. Trades require less babysitting and management. In crypto, exchanges lack the full breadth of orders necessary to properly manage risk, especially in a market that never closes.
Experienced crypto traders can share countless stories about missing a huge pump while they were sleeping because they had their downside protected with a stop loss and were unable to set sell orders at their targets. Traders should never have to choose between taking profit and properly managing their risk.
I can turn $10 into $1,000 with leverage!
Leveraged trading is far too common among beginners. Leverage is a tool that should only be used by the most experienced traders, those who have proven to be profitable for years.
The barriers to entry are non-existent in crypto, on exchanges that are built to transfer the wealth of inexperienced retail traders into the pockets of the exchanges themselves. Beginners will likely lose everything they risk trading with leverage because the downside is massively compounded.
Getting rich quick is easy, right?
In legacy markets, nobody expects to get rich quick. Crypto appeals to people looking to quickly turn a small sum of money into their retirement, which is unrealistic. Twitter is selling Lambos while beginner traders end up selling their cars on the used lot to pay rent.
Those who got rich quick in crypto were most likely lucky, not good. Further, there is a difference between being wealthy on paper and in real life — most of the crypto traders who “got rich” failed to sell at the top and saw their paper wealth disappear as quickly as it was made.
Crypto is not a safe investment
An inexperienced person is far less likely to go broke buying a random stock than they are buying any available asset in crypto. The stakes are far higher! Crypto is not a safe investment and should only be a small part of someone’s overall portfolio.
I get all of my trade advice from a cartoon on the internet
While there are experienced and successful traders on social media, most beginners are learning from other beginners and don’t know it. Taking financial advice from strangers on the internet is the cornerstone of the crypto market.
There is no surer path to financial ruin than spending your hard-earned dollars on assets being shilled by avatars who are likely manipulating you for their own profit. Never base your decisions on the advice of those who don’t have to deal with the results.
Traders do not average down!
A common grave mistake many traders make is Averaging Down: buying more of the coin as the price drops with the logic that a good thing is now cheaper (an even better bargain). This logic applies to investing, not to trading.
A trader has an invalidation level for their idea — price dropping significantly should invalidate their trade and cause their stop loss to fire! Most beginners do not understand this and dig a deeper hole than necessary.
Risk management is everything
Risk Management is boring — and happens to be the most essential skill necessary to be profitable. Understanding how much to risk on a trade and how to properly balance a portfolio are exponentially more important than entries and exits. Learning this takes time — most new traders are broke before they understand risk.
Most people would be far better off slowly investing a small percentage of their entire portfolio in crypto — and in Bitcoin, in particular. Don’t be fooled by the avatars on twitter — trading crypto is hard.