Cryptocurrency is one of those asset classes where, for as blasé as the saying is, it’s accurate to proclaim “there’s just something about it.”
A lot of that is attributable to youth. Bitcoin is the oldest digital currency and if it was a person, it couldn’t legally vote, let alone buy alcohol or gamble. Of course, much of crypto’s allure is sourced by way of the prospects of big gains in short order. That’s a double-edged sword because crypto epitomizes the notion of there being no free lunch in financial markets. Said another way, the possibility of large gains is accompanied by the specter of equally significant or even bigger losses.
Yet many new market participants remain undaunted by the possibility of crypto potentially adverse effects on the health of their brokerage accounts. They pour into the most speculative corners of the space, buying what amount to be lottery tickets in search of quick riches.
This isn’t unusual behavior, particularly among fresh investors. It’s been going on for years with micro-cap and penny stocks and more recently with “meme” stocks. Young, novice investors often want to get rich quick and they’re willing to embrace the assets they think will help them accomplish that objective. Crypto certainly checks that box, but not without considerable peril.
Cryptocurrency Can Break Hearts (And Accounts)
With bitcoin and ethereum, the two largest digital currencies by market capitalization, ascending to record highs this year, it’s not surprising that more adventurous traders want to try their hands with crypto. A new survey by NFT Evening reveals they ought to be careful.
The poll says a staggering 84% of retail crypto traders lose money in their first 12 months in the game. Some get the hint with a third abandoning crypto trading in their first six months. Unfortunately, some don’t get that memo with 58% telling NFT Evening that they lose nearly all of their capital in their first year of trading digital currencies.
Ascertaining why so many newbie crypto traders fail isn’t difficult. In nearly all cases, it’s preventable because their accounts get bombed by failure to control their own impulses or poor research.
“Our survey shows that the two most common mistakes beginners make are poor research (55%) and FOMO (44%),” notes NFT Evening. “More than half of new traders admit they enter trades without fully understanding the market or the asset, making decisions based on excitement and rumors instead of solid, well-checked information. Almost as many jump into trades when prices are at their peak because they are afraid of missing an opportunity, only to face losses soon after.”
Other Ruinous Crypto Behavior
It’s not just FOMO and poor due diligence that plague many rookie crypto traders. The burning desire to make a lot of money quickly is highly problematic. As NFT Evening points out, 54% of the new traders that blow out crypto accounts in their first year do so because they day trade and another 17% get to that imperiled state by swing trading.
Though not overtly stated, those percentages imply many new crypto traders are embracing meme coins or small-/microcap assets because it’s confirmed in real time that biggest gains accrued with the likes of bitcoin and ethereum arrive over weeks, months and longer holding periods – not over a matter of days.
Compounding the problems of novice crypto traders is that a fair amount rely on promise-laden though highly flawed technology with a third using trading bots or copy trading, according to NFT Evening. In other words, their long on hope and short on risk management.
“Our survey found that 66% of traders who trade often end up with bigger losses, especially when they don’t use proper risk management,” concludes NFT Evening. “In fact, over 85% of new traders fail to consistently use tools like stop-loss or take-profit orders, leaving their capital exposed to sudden market swings.”
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