7 true facts and risks in cryptocurrency business
In recent times there has been a veritable bombardment of news related to cryptocurrencies.
This has been reflected in a greater investment volume in this type of assets, in some cases, carried out by those who have little knowledge. What is the denouement of the story between cryptocurrency investing and a novice investor? Generally, mistakes are made that can be financially damaging.
It does not hurt to attend to what are the main failures that are undertaken when investing in these digital tokens and, also, what are the best solutions to reverse the situation so that it does not happen again, according to the experts consulted by Business Insider Spain.
Most agree on the same aspects.
Invest in something that is not understood
When to save and when to invest
As Warren Buffet says: “You have to invest in what you understand and have the right knowledge.” The same thing happens with cryptocurrencies. Javier Castro-Acuña, Bitnovo’s Business Control Manager, the main mistake is investing in something that is not understood.
“No one should invest in products or assets that do not understand or are unaware of the risks involved,” he says.
How to solve it? In his view, studying, researching and informing himself, in addition to not allowing himself to be carried away by the opinions of third parties but forming his own. “Once you understand where the money is going to be put, then the risks involved will also be understood and therefore only money that is not needed and in amounts that one can afford to lose without impacting their economy will be used,” he adds. Alejandro Zala, Bitpanda manager in Spain agrees on this point: “the main rule is to invest in something with which you feel comfortable and can sleep peacefully (…) This applies to any product and translates into understanding where you are putting your money and let it be an amount that you don’t need in the short or medium term. ”
Thinking of getting rich in a short time
A man with cash
Another common mistake is to believe that you are going to make money quickly, because cryptocurrencies should be considered as a long-term investment as they are new technology that, until greater adoption occurs, will continue to suffer from volatility, Castro-Acuña says.
The solution, according to experts, is to have a cool mind and realize that the investment world does not work like sports betting or the casino.
Invest beyond the possibilities of each one
Here another added risk comes into play, which is making leveraged investments. “Investing in cryptocurrencies should be done with money that is not needed and in no case borrowing, so that they simply constitute a small percentage of the investment portfolio, either considered as a diversification or as a safe haven asset against inflation,” he deepens the Bitnovo expert.
For Raúl López, head of Coinmotion Spain, an advice in this sense that is already known but sometimes it is good to remember it because it is easily forgotten is not to invest beyond the possibilities. “That is to say, invest an amount that you can allow to assume losses and that does not affect the general economy of the investor,” he says.
Buying a cryptocurrency just for the fact that “it is very cheap” thinking that if it is worth 1 cent the same, its price will be multiplied by 100 and it will be worth 1 euro, without analyzing its function and utility, issuance method, how it will be distributed and in what terms, who are the developers, what community supports them, how the project will be governed or how it captures or generates value, among other factors that are really much more relevant than price.
The emotional factor, as in all investments, plays a fundamental role and is one of the main mistakes made by newbies. Buying and selling for tabloid headlines or news that often contain inaccurate or unrealistic information is quite common.
According to Alberto Fernández, professor of the IEB’s Specialized Program in Blockchain and Digital Innovation, when initiated investors invest in a cryptocurrency, emotion tends to play a trick on them and it costs them both to take losses and to liquidate profits.
“Therefore, the emotional connection with an investment that is aimed at profits, greatly impairs correct decision-making,” explains Fernández.
How to solve it? As Fernández points out: “emotional factors can be corrected by setting both sales and purchase objectives, with margins by which a percentage of the investment is liquidated, or invested in another asset.”
In the opinion of Ismael Santiago, professor and doctor in finance at the University of Seville and CEO of Olivachain I + D + i, investors generally have little financial education and many decide to jump on the bandwagon due to the FOMO effect (fear of miss the rise of the crypto market). “This has generated significant losses among these novice speculators who have been advised by inexperienced friends and brothers-in-law,” he explains.
“In addition, many of these novice investors do not know the value that the implicit technology of crypto assets such as DLT / blockchain brings (disintermediation, greater integration of the value chain, informational traceability, veracity in transactions)”, he adds. to find profitability in the face of the diversity of cryptocurrencies
Getty / gopixa
In addition, the large number of cryptocurrencies on the market sometimes makes it more difficult to find those that are really a good investment or that have a really useful practical use.
“The main recommendation is that before starting to invest in the cryptocurrency market, it is important to understand the basics of how it works,” advises López.
“On the other hand, it is very useful to know where the real value of the asset you are going to invest resides in and what the factors may be that may contribute to its growth or decline”, explains the head of Coinmotion in Spain.
Choosing the wrong platform to invest in
Cryptocurrency values are seen in a Bithumb, the largest cryptocurrency trading store in South Korea
Cryptocurrency values are seen in a Bithumb, the largest cryptocurrency trading store in South KoreaJeon Heon-Kyun / EPA
Another aspect to keep in mind is that some platforms indicate that they have zero commission on both the purchase and sale of cryptocurrencies. “If so, where do they get their profits to keep their business afloat?” Asks López.
Surely the price at which you are going to buy a cryptocurrency will be much more expensive than the market average and when you sell it the price will be much cheaper. “Try to find websites that are as transparent as possible in that sense,” advises the Coinmotion expert.
Hence the importance of being alert when we find offers that are too attractive and if any suspicious email or website should be reported to the authorities, put all the money in a single cryptocurrency
The risks of cryptocurrencies: 8 things you should know before investing in bitcoin
Given Ruvic / Reuters
In addition, it must be taken into account that technical ignorance can cause a novice investor to allocate all the investment money to a single cryptocurrency, which violates the basic principle of diversification.
“Diversification is necessary and for this the best thing is to study rank methods”, recommends Fernández.
“We study how much we want to invest and assign high, moderate and low risk values (for example) (…) We assign percentages of risks that we want to assume and we are correlating these values with cryptocurrencies that we have previously studied and quantified the risks,” he concludes.