Since I started investing in Bitcoin (BTC +0.82%) in the early 2010s, I've made quite a few mistakes in cryptocurrency investing that it would be good for other investors to avoid. Each of these errors eventually taught me something valuable, and, with practice, I don't make them anymore.
Here are four of my worst mistakes -- and how to avoid making them yourself, even when it's very tempting.
CRYPTO: BTC
Key Data Points
1. Buying the top
My most consistent mistake in crypto investing has been to buy when coins are pricey due to fear of missing out (FOMO) on the rest of an ongoing speculative boom.
Let's take a moment and look at a chart of Dogecoin (DOGE +2.14%) over the past five years:
Dogecoin Price data by YCharts
If you had the power to choose, where would you prefer to buy? Probably well in advance of 2021's major run-up, though getting in after the first small wave of attention wouldn't have been too bad. Even after the big crash, you'd still be holding your coins at a profit.
Now, where would you least prefer to invest? At the top of the peak in 2021, of course. And yet time and time again, countless cryptocurrency investors make the choice to buy when prices are in the stratosphere, only to later get shaken out of their positions when the price drops.
Avoiding this mistake is easier when you appreciate that there are many different opportunities to catch in the cryptocurrency market. It's true that speculative bubbles in a coin's pricing can last much longer than most people expect. It's also true that if you're patient enough, sometimes it doesn't matter what price you buy your tokens at.
But you'll have a much easier time holding onto your positions if you accept that you're not going to be able to capitalize on every single opportunity, including some of the ones that become the most popular. Always try to step back and recognize where the market is in the hype cycle before committing.
CRYPTO: DOGE
Key Data Points
2. Assuming that an end use is necessary for a coin to flourish
As you may have guessed thanks to the success of meme coins like Dogecoin and Shiba Inu (SHIB 0.55%), among others, a cryptocurrency does not necessarily need to have an actual use for its price to run up to absurd heights.
In fact, to date, no utility coins intended solely for a non-speculative purpose have ever reached anywhere remotely in the ballpark of the coin market caps of the big memes. With the advent of distributed autonomous organization (DAO) coins and other utility-oriented projects, that may eventually change.
For now, a coin having an actual end use is just a bonus, and only if the strategic vision of the coin's developers is persuasive and brought to fruition. And take note: The Shiba Inu team's plan to build out an ecosystem of services called the Shibarium during the past few years has done very little to raise its price. So simply adding utility to a meme coin project is not necessarily adding much value.
CRYPTO: SHIB
Key Data Points
It took me a long time to recognize that utility is not everything. I watched Dogecoin rise from the sidelines, convinced that it would never be used for anything, and that it would crash to zero.
It did crash. But not to zero. And people still buy it to this day. The lesson here is that sometimes our instincts derived from outside the cryptocurrency market are totally wrong, and it pays to study how and why.
3. Dumping coins to take profits
Letting your winners ride before taking profits is often a good choice. When it's time to cash in, there's a right way and a wrong way to take profits from your winning positions.
The right way is to know when a coin has reached one of the price targets in your investing plan, trim a sizable chunk off to take profit, and then reassess whether it's worth holding the remainder for longer.
And then there's the way that I've tended to do it: Selling 100% of my holdings in one go after giddily holding it on the way up, past my original price target. The consequences were missing out on even larger gains from holding even longer.
I made this mistake multiple times with my Bitcoin positions from 2012 through 2015 because I lacked the conviction to hold -- and those tokens would be worth millions and millions now. Look at this chart:
Bitcoin Price data by YCharts
You might be thinking that it's not so bad to take profits too heartily, as at a minimum the profit is secured, and you're correct on that point.
It's a question of optimizing your investing workflow for making the most money; if you don't need the profits today, and you don't have a better investment to funnel the extra cash to, there's simply not much reason to quit your position entirely if your investing thesis remains valid.
4. Being too risk averse
Cryptocurrency investments are among the most risky. If you're approaching the sector at all, you're already fairly risk tolerant. But there's such a thing as being too risk averse when it matters the most.
Let's go back to the Dogecoin and Shiba Inu examples. My risk tolerance told me in both cases to avoid investing in a useless meme coin. After it was clear that both were getting a lot of investor attention, I maintained my position that it was too risky to buy, and the prices kept rising. Eventually, I caved and bought Shiba Inu, just past the prime period of its rise, and just before the fall to earth.
It's preferable to take risks early in a coin's tenure, when you don't know whether it's going to become established or die out. The risk aversion in you is going to say that the investment is not yet proven, and it isn't. But if you wait until it is, you'll likely be too late to have a chance to take profits for a very long time.
So don't let fear of risk control your behavior -- look at the balance of risk and reward as it appears, then if a decent-looking investment seems super risky, adjust by scaling down the size of your starting position rather than waiting for the good times to pass.
