Crypto trading offers interesting opportunities to make money online, but only if you do it with the necessary knowledge, patience, and willingness to learn continuously. As you should know, statistically, more than 70% of traders lose money. If you don't want to be among the traders who lose money, you should implement effective trading strategies and sound risk management. But why people lose money on crypto? It happens due to various reasons, such as lack of financial knowledge and understanding of the psychology of the financial markets, getting liquidated due to high volatility, not implementing proper risk management and diversification strategies, psychological effects (such as FOMO and irrational trading), misleading social media influence, and lack of clear take profit pre determined targets. Only traders who are dedicated to learning, being patient, and trading systematically can try to be profitable in the crypto market.
In this analysis, PlasBit will research the main reasons why traders lose money on crypto. Through this analysis, you can gain valuable information and strategies to improve your trading systems and try to become profitable with cryptocurrencies!
Understanding Why People Lose Money on Crypto: Empowering Better Trading
First, you should accept that you never know enough about trading and investing. You have to be humble and give up being arrogant: Mistakes and losses are common and part of the path to becoming profitable; everyone makes mistakes in trading, which are useful to gain experience and skills over the long term. Short-term results, whether good or negative, are just a piece of a much bigger puzzle, and you must accept that long-term results are, instead, the main goal you should focus on.
Also, you should consider that the average yearly return on traditional investment is around 9-10%, as the performances of the S&P500 (the main indicator of the stock market) have demonstrated during the last decades and, as Warren Buffett said: "The first rule of an investment is don't lose money. And the second rule of an investment is don't forget the first rule. And that's all the rules there are". In fact, recovering a loss is mathematically more difficult than obtaining a profit (if you lose -50%, you should perform +100% to recover, just to make an example). Now, it's time to understand in detail why people lose money on crypto and the best strategies to become a profitable crypto trader.
Lack of Knowledge and Understanding
The main reason people lose money on crypto is the lack of knowledge and understanding of the crypto market. Investing may seem easy; only a few clicks are required to invest in crypto assets such as Bitcoin, Ethereum, and more. However, just buying crypto doesn't make you a profitable investor. Before investing in any asset, whether crypto, stocks, bonds, or other kinds of investments, you should learn about the market, the trading strategies, the risks, the security of your assets, and more.
Additionally, you should consider that the crypto market is different from the stock market: Even if you're a profitable stock investor, it doesn't mean that you can be a profitable investor in crypto as well. Mechanics and volatility are different, and you can't apply the same traditional strategies in crypto without understanding the profound differences. Concepts such as decentralization, mining, consensus algorithms, and smart contracts are foreign to many novice investors. Without a clear understanding of these concepts, it becomes challenging to evaluate the true potential and risks of different cryptocurrencies.
Case Study: 2017 ICOs' boom
Let's consider you started investing in crypto in 2017, during the ICOs' boom. During this period many tokens and cryptocurrencies have been launched, but only a few still survive and prosper: Most of them have failed and many investors consequently have lost money. They were often triggered by hype, FOMO, and persuasive marketing, rather than understanding the underlying technology or the feasibility of the projects. Additionally, you should always be aware of the risks of investing in cryptocurrencies to avoid investing in unsafe, unregulated, or scam projects.
How to Improve Your Crypto Investing Knowledge
If you want to become a better trader, without losing money as the 70% of traders, you should dedicate time to learn and expand your knowledge.
Here are some tips to improve your trading knowledge and skills:
- Study the Technology: First of all, if you're planning to invest in crypto, you should study the concept of blockchain technology, how it works, different types, utilities, and more. Only by understanding the intrinsic value of blockchain solutions, you can invest in the most interesting and profitable crypto projects, otherwise you'd lose money on no-value cryptocurrencies. Read books, articles, and whitepapers from credible sources, follow industry leaders and reliable experts, and stay updated with reputable cryptocurrency news websites.
- Engage in Communities: Communities are one of the main innovations of crypto projects. Unlike Web1 and Web2, where users rely on third-party platforms to get information and discuss, in Web3, communities are the real driving force behind a project. Without a community, you can't basically build a crypto project. If you're interested in investing in cryptocurrencies, you should always check the community of the project to identify potential red flags, listen to the feedback of other investors, analyze the team's behavior, and more. A healthy and growing community can be very beneficial to the crypto project. On the contrary, a frustrated and angry community can easily make a project fail.
- Hands-On Practice: Even if you have in-depth knowledge of the theory of investments in crypto projects, it's not enough. Theoretical knowledge is very different from effective action. When you open the first trade, you'll feel the adrenaline and hope for quick gains. However, as you can imagine, trading emotionally is not the best choice. You should always rely on rational decisions, be patient, and not get trapped by FOMO and hype. Of course, the first trades will be difficult, but by practicing with a small amount of money, you can gain the practice knowledge you need to become profitable in crypto trading. It will require time.
By investing time in education and knowledge about the crypto market, you can make more informed decisions and mitigate the risks associated with this complex asset class. Knowledge is the first and essential step towards becoming a successful cryptocurrency investor.
Market Volatility and Risks
Cryptocurrencies are different from traditional companies' stocks. The crypto market is less regulated, crypto projects don't have to share their financial data, and the market is more volatile, bringing at the same time more opportunities but also more risks. It's not uncommon to see cryptocurrencies that perform a 20% variation daily, while this is very improbable in the stock market. Both if you're a new investor or you've only invested in stocks until now if you're planning to invest in cryptocurrencies, remember to adopt sound and smart risk management to limit the potential losses. Rapid price swings are common, and you need to implement the right strategies to seize the opportunities while limiting the risks.
How do you improve your Risk management?
- Diversify with other asset classes: Cryptocurrencies should be only a small part of your portfolio, and you should diversify investing also in other asset classes, such as bonds, stocks, real estate, or others. Currently, institutional investors are allocating around 5-10% of their portfolio to cryptocurrencies while diversifying 90% of their portfolio among other assets. It's useful to invest in different types of assets to reduce the correlation between them and, consequently, the volatility of the portfolio and overall risks.
- Do not invest in a single risky cryptocurrency: Most crypto investors commit a critical error, investing only in their favorite cryptocurrency. It's not advisable since the technological risk is high in cryptocurrencies, and in case of problems, the price could rapidly drop until the value is zero, as happened in the Terra Luna case. $LUNA drastically went from $100 per coin to $0 in just a couple of days. By investing in various crypto assets, you can spread the risks among many assets, reducing the risk of serious collapses of specific crypto prices.
- Set stop losses and take profits: If you're an active trader, you can limit your potential losses by placing stop losses in your trade. A stop loss is an automatic sell of your trade when a predefined parameter is reached. For example, if the crypto price is $10, you can decide to automatically sell if the price drops to $8, limiting additional losses. However, even if it may seem simple, it's not. You must be an expert, seasoned trader to put stop losses and take profits in the right position. Otherwise, you risk losing even more money than simply holding. Carefully study price resistances and supports, and test your strategy before implementing it with real funds. With time, you'll be able to set stop losses and take profits in the right position, effectively implementing sound risk management.
- Implementing Technical and Fundamental Analysis: If you're thinking of investing in crypto assets, you might be wondering how to understand if a crypto is overvalued or undervalued. Fundamental and technical analysis can help you recognize price patterns and undervalued cryptocurrencies, reducing the risk of investing in the "wrong" asset. Fundamental analysis focuses on understanding the underlying value of the crypto asset, analyzing the team, the use case, the community support, and more, and it's mainly used by long-term investors looking for promising growth-oriented cryptocurrencies, often undervalued. On the contrary, technical analysis focuses on the price chart's pattern and indicators, analyzing the sentiment of investors and trying to predict the next short- and medium movements of the cryptocurrency, and it's mainly used by short and medium-term traders.
At PlasBit, we recommend recognizing the risks of volatility of crypto assets so that you can adopt sound risk management practices to prevent big losses. Always ensure to respect your trading strategy without relying on emotional trades.
Frauds and Scams
It's common for new crypto enthusiasts to lose money in crypto frauds and scams. Being poorly regulated, the crypto ecosystem allows everyone to create a project and a token. Consequently, people, often manipulated with misleading advanced marketing techniques, fall trapped in crypto scams. But how can you prevent yourself from being a victim of a crypto scam? The first suggestion we give is to be educated about the most common crypto scams, so let's explore them in more detail.
Ponzi Crypto scams
One of the most common forms of fraud is Ponzi. People are attracted by promises of high profits in a short time and are often trapped in Ponzi scams. In this type of fraud, the scammers pay profits to early investors through the investments of new investors without creating real value and business. The only way to make the project live is through the funds of new investors. Once the project cannot attract new investors, it implodes itself, and the scam comes to light. Investors lose all their money, and the only ones who actually make a profit are the team members who escape with the loot, disappearing into thin air.
Pump-and-dump schemes
In this fraud, the scammers create hype and FOMO for their crypto project through advanced and manipulative marketing tactics, attracting many potential investors. However, once the token is launched and investors start buying it, the team sells the majority of the tokens, dumping the price and stealing money from the new, unsuspected investors. The price pattern in pump-and-dumps is clear: once the price quickly surges, driven by the FOMO and hype created, the team sells the tokens, and the price drops. Investors lose all their money in a scam token, and the price will never recover again.
Slow Rug Pulls
Another dangerous scam is the slow rug pull, in which scammers manipulate users' perceptions over time (often weeks, months, or even years) to raise as much funds as possible. The team makes the community believe that it is building some revolutionary features and that it takes time. However, the team's goal is only to raise funds and make users believe that the project is continuously being built. As you can imagine, once the scam is evident and the team doesn't deliver any service or products for a long period, people realize that they have lost money. The team, also in this case, disappears with the stolen funds without delivering any of the features promised.
Fake Exchanges
Another recent crypto scam is based on fake exchange. The scammers, after scraping the web for the perfect victims, contact them and progressively earn their trust. The scammers pose themselves as friends or often as potential partners, gaining the trust of the victim and becoming online friends or lovers. However, after some time, the scammers introduce the concept of crypto investments, incentivizing the curiosity and interest of the victim. Once the victim decides to invest in crypto, the scammers propose to help by being intermediaries to apply advanced crypto trading strategies. However, even if the scammers seem reliable, they’re showing fake trading dashboards on fake exchanges, basically stealing funds from the unsuspecting victims. Once the victim tries to cash out their crypto, the scammer disappears with the stolen funds.
Sadly, these are just some of various crypto scams that sabotage the crypto industry.. You should learn more about the most common crypto scams to recognize their red flags and avoid being a victim of them. Dedicate one day to read, learn, and implement the most advanced security measures to prevent falling trapped in crypto scams.
Psychological Effects
Markets are irrational, and people are the driving force behind the prices' movements. If the majority of people act in the same way, and the majority of people (over 70%) lose money on crypto, you can easily understand that "doing what others do" is not a convenient choice. There are various psychological reasons that fuel prices surge and drop, and you should be aware of them to avoid emotional trades and lose money on crypto.
FOMO (Fear of Missing Out)
If you follow the hype and invest when a project is trending, you'll probably lose money. When the hype is exaggerated and the project is heavily promoted to create FOMO, you should avoid investing in it. If a project is already too popular and the price has already surged, the next price movement will probably be a dump. Cryptocurrencies that are going up do so because people are excited about buying them and the potential profit. However, as you can imagine, when the price gets high enough, the first investors start selling to cash out the profit, and the crypto price starts to fall. If you invest because of FOMO, you're probably investing in an overvalued cryptocurrency that will likely crash.
Emotional Investments
Never rely on your emotions to make investments because it's not a smart move. The best investors apply advanced strategies methodically, often automatically, based on predefined parameters and indicators. Impulsive decisions bring quick losses and unnecessary stress. Always follow your trading strategy and never act emotionally to recover a loss or make a bigger profit. Remember, with patience, willingness to learn, and a studied strategy, you can obtain good profits in the long term. Additionally, never trade if you are in a situation of stress, anxiety, or anger, as this would increase the chances of trading irrationally and, consequently, losing money.
Influence of Media and Online Communities
Your favorite crypto influencer just shilled a cryptocurrency on his Twitter profile. Is it the right time to invest in it? Of course, it's not. Influencers are often paid by crypto projects to promote their tokens, and the advice is always biased and not impartial. People who promote crypto projects have direct interests behind it, and when you buy the cryptocurrencies, they'll probably sell their holdings. In crypto, it's very difficult to find a reliable source of unbiased information, since paid promotions often bring consistent earnings to promoters, websites, influencers, and more. Consequently, the only one who you can trust is yourself. Prioritize DYOR (Do your own research) to get an unbiased view of the crypto project before investing in it, and use technical and fundamental analysis to understand if it's worth it.
Crypto Communities
You can also engage in communities to ask questions and opinions, and they often provide valuable insights about the project and the team, but as the influencers, their opinions may be biased and influenced by personal investments. For example, if you join the Solana community to ask if it's good to invest in Solana, you'll probably receive positive feedback. It is because you asked for advice from people who actually invested in that project and have underlying interests in making the ecosystem grow through the funds of new investors. So, critically analyze the feedback you receive, prioritize DYOR, and always remember to rely mainly on your research and your strategy.
Why People Lose Money on Crypto: Final Overview
We hope that this analysis can help you make more informed, smart, and weighted investment decisions. The crypto market has created numerous millionaires in the last few years but has also made some people broke. As happened with $LUNA, for example, a crypto crash can bring devasting results, and in that specific case various people committed suicide.. You must always prioritize sound risk management to prevent and avoid big losses while effectively seizing the opportunities of the crypto market.
At PlasBit, our goal is to provide people with all the information and tools they need to reach financial freedom. Blockchain and cryptocurrencies, in fact, can give people full sovereignty over their funds while avoiding the devaluation typical of inflated fiat currency systems. However, financial freedom comes at a cost. You must take full responsibility for your assets, implementing advanced security measures both in storage and trading and prioritizing safety over short-term gains. In conclusion, as Warren Buffett said: 'The biggest thing about making money is time. You don't have to be particularly smart, you just have to be patient'. Remember, he accumulated 99% of his net worth after turning 50, meaning that great achievements require time, sacrifices, patience, and always following the plan and strategy. We hope you gained useful insights and that you will implement advanced risk management strategies to avoid big losses while seizing the crypto opportunities. Happy (safe) trading!
