"Why Most People Lose Money Trading Cryptocurrency"
The vast majority of cryptocurrency traders lose money. Why?
This article examines the most common mistakes that all traders have made in the past, continue to make in the present, or will make in the future. It will reveal facets of your trading that are weak, expose vulnerabilities that you were previously unaware of - or neglected, and provide a few simple ways to adequately address them.
If left uncorrected, these mistakes result in a chronic state of unprofitable trading. But recognizing these commonplace pitfalls and their underlying causes can help you overcome them.
The first step in upping your game - increasing your trading acumen - is to recognize the impact of your mindset on your performance.
Is it helping or hindering your endeavors? Does it give you "staying power"? Or does it keep you from performing at your best?
Poor Motivation: Why the "Why" is Crucial
Why are you trading cryptocurrency?
Unless you are participating in cryptocurrency for the sole reason of protesting the current monetary system - which probably means you’re rich too - the question: “Why are you trading cryptocurrency” may sound idiotic.
Most people answer that question while rolling their eyes, snarking something like, “To make money, of course!”
But that answer is superficial and incomplete. It is shallow, trite and utterly useless to anyone.
Why?
Because it doesn’t inspire.
If that sounds confusing or vague, think of the question in this way: “Why are you trading cryptocurrency instead of doing something else to make money?”
Let’s face it, there are countless other things to do with your precious lifetime to make money.
Cryptocurrency trading can be lonely and frustrating. It requires starting capital, a lot of time, effort, self-education, and basic computer expenses. It involves battling self-doubt because of the amount of uncertainty in the cryptocurrency market.
Overzealous and underfunded, many novice traders are further psychologically tormented and emotionally distraught because they were speculating with the money that was previously ear-marked for the essentials of daily living.
No matter how affluent you may be, never - ever, ever, ever - trade cryptocurrency with money you cannot afford to lose. Period.
Sadly, this is an all-too-often event that I have witnessed countless of times over the years. I emplore you to think.
Think hard.
Knowing all of this, again I ask, “Why choose cryptocurrency trading?”
The All Important "Why" Explained
Energize or Paralyze?
One of the most significant, life-changing advice that an early mentor gave me was, “Once you know the ‘Why’, the ‘How’ becomes a Hell of a lot easier, especially if that ‘Why’ makes you get off your ass.”
The point is this:
If you don’t know why you are doing something - or constantly reminding yourself of the original “Why” - your most likely outcome is failure. You become easily prone to quitting.
If your “Why” is not strong, if it doesn’t inspire, motivate, promotes the tenacity needed to continue the endeavor - and make you excited while doing it, boredom sets in. You’ll become easily frustrated, sometimes angry or desponded. When that happens, quitting is inevitable.
If you truly know your own, special “Why”, you begin to automatically cultivate a growing pool of resolve that becomes a source of strength to “keep on keeping on”; persevering and overcoming the inevitable obstacles. You raise your tolerance to temporary setbacks and unexpected negative events - things that would normally defeat people with less motivation. In other words, you won’t buckle at the first sign of discomfort, difficulty or fatigue; instantly throwing up your hands in exasperation and eventually quitting.
Your biggest enemy in trading is yourself. The more you know about yourself, the better your chances are at success.
A good “Why” is that spark that creates a burning desire to accomplish your goal. And in the face of seemingly insurmountable challenges, a good “Why” can keep you motivated towards action - the action that leads to success.
So, do you know your “Why” well enough?
Wrong Choice
Prevent a Bad Beginning Before You Start
How can you prevent a bad beginning?
Simple.
Know your Cryptocoin.
In reality, the first and greatest determinant of making a profit in any investment is not the final sell price, but the initial buy price. - Buffet (paraphrased)
In other words, there are a thousand reasons why someone sells, but only one reason why someone buys - the prospect of future profit.
If you don’t intimately know your cryptocoin, your betting on the wrong pony from the start. And it only takes a couple of costly, failed starts - due to the wrong choice from the beginning - to make you want to quit altogether.
Buying a hot commodity just because everyone else is buying it is like the person who gets caught up in the fervor of crowd enthusiasm - fabricated, usually staged by an unscrupulous salesman with planted, fake customers. Amongst the excitement resembling the craziness of an old style evangelical tent sermon, the naive customer ends up spending his family's food money on cases of “snake oil”.
There are over 831 different cryptocoins - Bitcoin, Litecoin, Ethereum’s ETH, Ripple’s XRP, etc - in the cryptocurrency trading space.
Avoid Scamcoins
Holding the Bag?
Avoid “scamcoins” - knock-offs of established cryptocoins that were created strictly for a quick profit to the founding owners and angel investors, then quickly fading away into obscurity.
You must choose wisely.
Scamcoins are classic “Pump and Dump” schemes, leaving the masses of naive traders and ignorant investors "holding the bag" of worthless coins and empty pockets.
“Initially, the market is a popularity contest, but in the end, it is a weighing machine.” - Graham and Dodd (paraphrased)
Choose a cryptocoin that you really beleive in. That belief must be so strong that it guards against caving in - greedily buying blind or panic hyper-selling - during the manic-depressive behavior of any market.
Accept the fact that all markets have bullish and bearish cycles and that you must tolerate the ebb and flow of the market’s mood and motivation. To do that, you must know the story of your chosen cryptocoin inside and out.
Why was it created? What sets it apart from other cryptocoins? How well was it recieved? What are the advocates and critics saying about it?
Become an expert in your cryptocoin. Thoroughly know its mission and vision - purpose, origin, creators, major supporters and detractors, price from ICO to the present, rate of adoption and growth projections.
The SWOT
Analyzing Coin Candidates
Perform your own SWOT analysis.
One of the few things I learned and remember from my MBA was the SWOT. It’s a great tool that business analysts use when investigating the state of a current business or as a filter for prospective investment opportunities.
In a nutshell, SWOT means:
Strengths - Internal strengths that the cryptocoin, its creators and its community possesses in relation to its nearest competitor.
Weaknesses - Internal weakness and issues that are vulnerable to attack - non-scalablibility, weak adoption, speed of transaction, etc.
Opportunities - External opportunities that the cryptocoin can exploit.
Threats - External threats - new competitors, overall economy, changes in technology, poaching of key employees by another company, etc.
How well do you know your cryptocoin?
Fast and Dumb?
Performance Types and Traits
During my decades of military service and later in corporate life, I learned to spot four distinct categories of performance.
At the top of the list were the “Fast and Smart” operators. They not only knew all the rules within a mission’s context, they were super-fast at executing them flawlessly too. These “Fast and Smart” individuals were fast-tracked through the ranks - or skipped multiple upward rungs of the corporate ladder.
The second place on the performance scale goes to the “Slow and Smart” people. I knew I could count on them to do the right thing and do it properly - as long as it was not required immediately. But they were inherently slower than their “Fast and Smart” cohorts and not promoted early.
Ironically, the amount of time these people naturally spent before doing something would often result in a more creative alternative for problem solving. Unfortunately, big organizations like the military and multinational corporations are slow to change and innovation is not easily adopted or appropriately rewarded - if it fails it was the creator’s fault; if it succeeds, the supervisor takes the credit.
The Bronze Medal - third place - goes to the “Slow and Dumb”. They usually were not malicious. And since it doesn’t take long to recognize their innate inability to perform tasks properly and their tortoise-like speed - When I observed them, I swear I thought I was looking at a video in slow motion! - the usual way to deal with them was to avoid giving them any important or time-sensitive tasks.
Subsequently, the “Slow and Dumb” are labeled “imbeciles or slackers” and remained at the lower ranks - or the floor worker to lower management positions of a company - too long and eventually booted out of the service or fired from the company for “not meeting minimum performance standards”.
The lowest - and most dangerous - types were the “Fast and Dumb” people. They routinely overestimated their knowledge and expertise. They were deaf to friendly advice and hostile to constructive criticism. “Going off half-cocked” - performing tasks without the proper skills and knowledge - produced a track record of one blunder after another. The “Fast and Dumb” operators posed a great threat to any organization. Many times, catastrophic damage was done before anybody could have prevented it.
These people were officially reprimanded and dishonorably discharged - or fired. But if they were convicted for committing - or were caught in performing - an act that extremely compromised the mission, undermined security, or resulted in damage to infrastructure or injury to personnel, they were sent to Court Martial - or stand before a civilian judge. If convicted for committing a major violation of the UCMJ (Uniformed Code of Military Justice) - akin to a felony in civilian life - they had to serve time in military prison - or in the case of civilians, incarceration in a federal penitentiary.
Don’t be “Fast and Dumb”. It only leads to a train wreck of personal strife, losing money quickly and possible legal action.
Know the Rules
Ignorance is Not Bliss
Know your trading platform and your chosen cryptocurrency exchange policies and regulations. This means getting smart on the browser or application’s strengths, limitations and any significant glitches.
Getting to the “Smart” stage also requires you to be expert on your exchanges’ funding policies, trading pairs, buy/sell spreads, fee per trade, optional margin trading, minimum withdrawal amounts, forms of authorized withdrawals, fees per trade, useful and subpar capabilities - in relation to its competitor exchanges, KYC/AML policy, etc.
If you consider yourself smart, work on execution speed and effectiveness - fast, profitable trades. Do this by making “practice” trades on paper first, or actual “baby trades” using inconsequential trading amounts.
Write down your trade strategy in detail - and read several times, rehearsing the scenario in your mind each time, before actually going live and executing it.
Immediately after any trade is complete - “baby trade” or not - take a minute or two to jot down a post-trade debrief for yourself - especially noting the good and bad aspects of the experience. Reviewing the debrief will allow you to confidently make the next trade faster. Then “Rinse and Repeat”. Repetition of this process is the key to becoming “Fast and Smart”.
If you can provide a positive, complete answer to the following, congratulations. You're definitely in the upper percentile of traders.
How well do you know the rules? Is your platform intuitive and responsive? Can you fund your trading account with fiat or is funding limited strictly to other cryptocoins? How much preparation do you make before going live on an exchange? Do you remember what was good or bad of your last trade?
If you are in the “Fast and Smart” group, hats off to you. If not, what do you plan to do about it now?
Fiscal Mismanagement
Death by a Thousand Cuts
A friend of mine boasted about his recent trades. He told me that he bought an X amount of a cryptocoin, waited and then sold it at a higher price. I commended him on his “Buy Low and Sell High” wisdom, but after I calculated the cost of everything I knew about the process, I was certain he lost money.
Not wanting to rain on his parade, I refrained from voicing my conclusions. But later he realized that, indeed, his bottom line was in the red - a negative integer. That’s when he swallowed his pride and told me what the real outcome was. He couldn’t figure it out and he wanted to know why.
Now that I knew he was motivated to listen, I explained this simple fact of cryptocurrency trading:
“Every middleman takes his cut. If he doesn’t, he would go out of business!
Mass ignorance of this fact is why middlemen can get away with a myriad of unnecessary service fees, random/hidden charges of all types, paltry exchange rates, and exorbitant penalties."
If you don't know all the pieces of the puzzle, all the intermediate steps, or all the in-between stages, how can you successfully put it all together?
If you are not careful, your trading will die from a thousand cuts. Here’s a short list of costs - devoid of computer, internet, acquiring the required KYC/AML and any educational expenses - that many traders fail to take into account when judging the profitability of their trades:
Cost of Funding - the spread that any cryptocurrency vendor places upon fiat to cryptocurrency conversion.
Cost of Intermediate Cryptocoin to Cryptocoin Funding - many exchanges will not have the trading pair that you desire, so you must first buy one cryptocoin first to buy the cryptocoin you really want - incurring another charge when you buy it.
Exchanges and casinos are not dumb. Like an insurance company with their actuarial tables, every exchange predetermines the best funding pairs for them - especially for new ICO’s - and adjusts cost (conversion spread) in relation to the popularity of each cryptocoin - maximizing exchange profits commensurate to each coins liquidity.
Fees Per Trade - every trade incurs a trading fee. Some exchanges’ fees per trade policies read like it was written in Urdu.
Withdrawl Fees - Everytime you withdraw, you will be charged a bloated network fee that is figured into the withdrawl fee of the exchange. Additionally, if an exchange has fiat currency withdrawl capabilities, they require you to convert (buy) fiat with the value - a value that they set - with your cryptocoin. This process alone makes you pay twice - a poor exchange rate and the exchange’s withdrawl transaction fee.
Cryptcoin to Fiat Conversion - If you withdrew cryptocoin into an exchange-to-bank entitity like Coinbase to purchase something in your native fiat currency, you can expect to pay another conversion fee.
If you can’t measure it, you can’t manage it.
Now can you see how you must consider all costs before getting to a true reflection of profitability?
Parting Questions
These questions - if answered honestly - will show the what, why and how to bring your trading skills and performance up to the next level.
If you’re not having fun and profiting from cryptocurrency, have you revisited your initial “Why”?
Have you made an honest assessment of your skills and knowledge. Are you in the “Fast and Smart” group? If not, have you drawn up any battle plans to address that issue adequately?
What kind of preparation and debrief of trades do you currently perform? Can you make an accurate Profit/Loss outcome of all your trades?
If you can’t, you are not alone. But the correction of each common trading mistake is a step towards more profitable cryptocurrency trading.
Namaste. Happy trading!
About the Author, Not!
JaiChai has been in the cryptocurrency space for over 6 years. He is an enigma, regarded by his cohorts as sarcastic, funny, intuitive - but most of all, elusive. JaiChai alternates long dormant periods with concentrated periods of frenzied commentary - only to go silent again. He’s known for randomly submitting philosophical and contrarian posts on most cryptocoin forums.
When asked about his vanishing acts, he says, "I’m just somebody who enjoys being nobody because I look like everybody. Besides, time checking things off my 'bucket list’ - sans notoriety - is time well spent.”