Remember the old days when brokers were shouting “There’s no risk! Come in and become a billionaire!”? Well, those days are long gone… hold on, no they are not gone because now we have crypto trading robots that promise riches beyond imagination overnight, now we have wild swings in the price of cryptocurrencies and basically, there are risks all over the place. Can we minimize them? Of course! Keep reading.
Never Invest More Than You Can Afford To Lose
This is the oldest and probably best way to minimize risks when trading anything, not only cryptocurrencies. It’s also the best advice anyone can give you whether you are a new or experienced trader.
Let’s go back to late 2017 when Bitcoin was close to $20,000: according to many online sources, some people in the US were mortgaging their houses to buy Bitcoin and altcoins. And actually, most of the big crypto exchanges stopped accepting clients because they couldn’t handle the afflux of new customers, all the trading that was going on and the demand for crypto. When I’m writing this, Bitcoin is trading around $7,000 and you know what’s even worse? Ethereum. Late 2017 was over $1,200, now, almost a year later it’s just shy of $300.
After reading all I’ve just written, I think you understand why “Never invest more than you can afford to lose” is the best advice anyone can give you and the best way to minimize risks. People thought there’s no stopping Bitcoin, that it will go to $50K and that all altcoins worth pennies will eventually go to 10 bucks a piece. I was one of them! And I still think that cryptocurrency is the future of currency, but I never invested more than I afforded to lose. Can’t say the same for the people who mortgaged their house (if that’s even true) to buy BTC at 20K.
Do Not Invest With Small Brokers Or Exchanges
Many of the old shady brokers have rebranded themselves as CFD brokers with an emphasis on cryptocurrency trading. However, “rebranded” may be too big a word to describe their change; basically, they picked a new name and removed all binary options references from their website. These are the brokers that will lure you in with sweet talk and will offer account managers with “years of experience”, who will allegedly trade for you and make you rich. Yes, exactly how it was back in the glory days of binary options.
Don’t give your money to these brokers and don’t allow any account manager to trade for you, especially if he/she is working for that brokerage. With most of these brokers, when you win they lose, so do you think the account manager will make you money in the detriment of his employer? Don’t be naïve. Always look for regulated brokerages, with a relatively long time in business. Cryptos are not regulated but at least you know the company is supervised by a regulatory authority.
With exchanges, it’s a bit different: you will never trade against the house but against other traders and they will never offer account managers to trade for you. They make their money from the trading fees you pay them. However, some exchanges are better than others when it comes to fees and even the price of cryptos. So you could be ending up paying a higher fee as well as a higher price for your Bitcoins or altcoins. Choose your exchange carefully.
Beware of hacks!
A distinction must be made: with CFD brokers that offer crypto, you never own the coins and with exchanges, you do own them. CFD brokers: you trade Contracts For Difference. Exchanges: you literally BUY and SELL the cryptocurrency. So when you have cryptos in an exchange, you “physically” own them (yes, “physically” is not the best word because cryptos are non-tangible by nature but you get the gist). This means that you face the risk of that exchange being hacked. It has happened many times before (Google it or trust me) and in some cases, the clients have been reimbursed, in others they have not. Here’s a list of CFD brokers with Cryptocurrency trading.
So we come to the obvious conclusion: never keep your cryptocurrency in an exchange! If you are actively trading on a daily basis, keep only what you need for trading and move the rest in a personal crypto wallet, or if possible in a hardware crypto wallet (Ledger, Trezor, etc.). If you simply want to have cryptos and not plan on trading, buy it on an exchange and then move it all to a crypto wallet.
Beware Of Pump-And-Dumps
This one is chart related: you will often see spikes – a massive candle that takes price significantly higher. That is usually a Pump, especially if it happens on a low volume altcoin. And you know what comes after the Pump? The Dump, of course. Do not jump on that big candle thinking it will continue higher and you’ll make a nice profit.
Usually, the initial spike is created by groups of people who buy the altcoin all at once, thus taking price higher. Then they wait for the guys who haven’t read this article to jump on the bandwagon thinking it will continue higher. All those new traders will buy and take price higher, at which point the Pump-And-Dump group will sell (dump) all their coins at a higher price than they’ve bought. But because they’ve bought way before the other guys did, they already have a nice profit and the lazy birds are left with a useless altcoin that’s dropping in price like crazy. Don’t fall for it!
Wrapping it up
What I’ve covered so far is probably just the tip of the iceberg when it comes to risks associated with cryptocurrency trading and ways to minimize them. In case you’re still worried, here’s a longer article about How to Avoid 7 Common Bitcoin Trading Scams, and there may be a Part II if you want it but in the meantime, just use your common sense and the old saying “If it sounds too good to be true, it probably is”. Stay safe!