Six Things to Avoid When Investing in Crypto Assets
Jakarta – Cryptocurrency investment has emerged as an appealing avenue for investors seeking potentially high returns. However, these substantial gains are inherently linked to significant risks.
Without meticulous risk management, investors may find themselves facing losses rather than profits. So, what crucial aspects should be avoided to effectively manage risk when investing in crypto assets?
1. Lack of Research
Research is the main key in investing in crypto assets. An investor must first understand the crypto asset project of their choice. By doing in-depth research, investors can measure the potential and risks behind their decisions. It is crucial to avoid investing in crypto assets merely by following trends without conducting independent research, as this can invariably lead to losses.
When undertaking research, investors should perform fundamental analysis on the cryptocurrency. Key areas to investigate include the underlying technology, the problem it aims to solve and the proposed solutions, the development team’s background and expertise, the tokenomics (supply, distribution, and utility of the token), and the level of community engagement.
Ensure all information is sourced from reliable and official channels such as the project’s whitepaper and official website. It is also prudent to cross-reference information with various other credible sources to gain a well-rounded perspective.
2. Using Hot Money
When investing in cryptocurrency, it is imperative to consistently utilize “cold money” as your primary source of capital. Cold money refers to funds that have been specifically allocated for investment purposes and are not intended for short-term expenses or immediate financial needs. The non-urgent nature of these funds provides the necessary flexibility for strategic and patient investing.
Conversely, investors must avoid using “hot money” as capital for crypto asset investments under any circumstances. Hot money refers to money for daily living expenses, emergency savings, or derived from loan proceeds. Employing such funds is inherently risky due to the high price volatility characteristic of crypto assets. Moreover, the emotional burden associated with the potential loss of essential funds can significantly impair judgment and lead to imprudent investment decisions.
So, make sure to use funds that are specifically allocated for investment and do not disrupt finances if you experience losses.
3. Fear of Cut Loss.
Cut loss is an important strategy in crypto investing as it serves to limit losses and preserve capital. Sometimes, the price trajectory of a crypto asset may deviate significantly from your initial analysis and enter a sustained period of decline. If you continue to hold losing assets for fear of admitting mistakes or believing prices can rebound soon, it has the potential to make losses even greater.
When establishing a cut loss target, investors can use a tolerable loss that aligns with their individual risk appetite and investment strategy. For instance, if an investor is prepared to absorb a maximum loss of 25%, the cut loss level should be set accordingly. So, if the price declines by 25% from the initial price, investors need to execute a cut loss immediately.
Keep in mind that cutting loss is not an admission of failure but rather part of healthy risk management. Therefore, investors must maintain the discipline to execute cut losses promptly and decisively when the price of their purchased crypto asset breaches the predetermined level.
4. Lack of Discipline Take Profit
Just as important as cut loss, taking profit is also one of the important strategies for realizing profits. When the price of a crypto asset rises to a predetermined target price, investors must exercise the discipline to sell a portion or all of their holdings and secure the accumulated profit.
When implementing a take profit strategy, investors have several options, including recovering their initial investment to de-risk, selling only the earned profits while retaining the initial capital, or liquidating their entire position to realize the full gain. The optimal strategy will depend on the individual investor’s risk profile, investment goals, and market outlook.
Don’t let investors get caught up in greed that makes them hold on to assets that are already profitable for too long, hoping that prices will continue to rise. If the price turns around, the profit earned can actually be smaller or even lost. Therefore, investors must be disciplined to take profit when the target price has been reached.
5. Overtrading
In investing in crypto assets, investors should not get caught in overtrading situations, which involves excessively frequent buying and selling activities within a short timeframe. Overtrading often stems from emotionally driven decisions, rather than well-reasoned analysis and strategy.
This behavior is typically fueled by the desire to quickly recoup losses through frequent trades or by excessive greed after making a profit, leading to impulsive actions. Engaging in excessive short-term trading can result in substantial transaction costs and lead to poorly considered investment.
To mitigate the risks associated with overtrading, investors should develop a clear trading plan by setting limits on the frequency of trading within a certain period. Furthermore, it is essential to cultivate and maintain a rational and unemotional approach to trading.
6. Using Illegal Platforms
Conducting crypto asset transactions on illegal platforms puts investors in a vulnerable position because they do not get protection from possible fraud and transactions that do not comply with regulations.
Therefore, make sure to always transact on crypto asset trader platforms that are licensed as Digital Financial Asset Traders (PAKD) from the Financial Services Authority (OJK) and that are registered as members of the PT Central Financial X (CFX).