Crypto Investing Mistakes

Nat Eliason is a well-renowned writer who also dabbles in crypto. He wrote a great article on his crypto investing mistakes, and I thought it was important to summarise and explain some of these mistakes because they are very common ones.

1. Not Taking Profits

This is a very common mistake and one I am guilty of myself. I watched my position in Luna go up 10x… and then crash all the way to 0. It’s very important to take some of your initial risk off the table once you have experienced a price rise in your holdings. Don’t worry about extra gains you might be missing out on - capping your downside is important.

2. Spreading too thin

The word “diversification” is used a lot in discussions about investment. This is why investing in index funds is so common in the world of stocks and shares. You get exposure to the whole market, so you don’t have to worry about Apple missing its quarterly earnings forecast.

But Eliason makes the point that while indexing may be a good strategy for stocks, it might not be such a good strategy for your crypto investments. In a major stock market like the FTSE 100, you know most of the companies are well established. Crypto is more like the wild-west, so it is a space where it makes sense to make a few high conviction bets and stick to them.

There is always a cool new project launching and a new discord server to join in web3. But once you have found a few projects you really believe in, it’s better for your bank account to ignore all the noise and watch those few projects very closely.

3. Not recognising farms vs investments

Even good projects with solid fundamentals can end up being bad investments if they end up being farmed. This happens when the project offers yields that are very attractive. People rush in to take advantage but then dump the token very quickly when the market starts slowing down.

4. Misunderstanding Mini Hype Cycles

It’s not just the broader crypto market that goes through cycles - even certain parts of web3 go through their own hype cycles. The examples that stick out very clearly in my mind were the hype cycles around NFTs and Olympus DAO. After the success of the Bored Ape Yacht Club, millions of new NFT projects started launching on different chains, and people were obsessed with analysing, trading and flipping them. This hype cycle died out and eventually, the prices of nearly all of these projects came crashing down.

The hype cycle around Olympus DAO and all of its forks (like Time wonderland and Klima DAO) were even more spectacular. Without going into detail about the projects, their selling point was that they offered huge yields to investors for staking these tokens. And investors got taken in. The prices of Olympus DAO and all of its forks ballooned. But then once reality set in, people realised that these crazy returns would lead to massive inflation of the token and the market got worse, they crashed… hard. As we said, the price of Klima DAO’s $KLIMA tokens went from a peak of $3600 to $3.

5. Misunderstanding Cults

There are a lot of cults within crypto and a lot of people who evangelise projects and ecosystems with a level of aggression that I just can’t understand. Eliasion uses the sensible rule that if a project seems very cult-like, that’s a red flag. Projects with solid fundamentals don’t need to behave in a cult-like manner and attack anyone who says anything remotely negative.

PATIENCE

There is one key theme among these different lessons - sometimes it’s better to be patient and be less active. Even though it might not feel like the right thing to do, it can increase your profits in the long run.