How people lose their money by investing in cryptocurrencies, and how to avoid falling into the same traps.

Everyone wants to become the next crypto millionaire and even though there are a lot of ways you can make big money in this market, it is important for people who are new to investing to be aware of what not to do.

Here are the top 5 ways people lose money in cryptocurrencies and how to avoid them.

1. Fear of missing out or FOMO.

Photo by Dmitry Ratushny

The Fear Of Missing Out (FOMO) is the pain many feel when they see the price of a coin go up exponentially and you just can't help but want to be part of that party. It is an incredibly powerful psychological phenomenon that sees many people pile into markets that are skyrocketing because they are so afraid they are missing out. Unfortunately, this means that a tonne of people pile in at the top of the market just before it goes down dramatically.

Don't get eaten up by the big whales that constantly taking advantage of this weakness in human psychology. They will pump worthless coins until enough people have joined the party and without warning will pull out, scooping up all the small fish in an instant.

There are two ways to avoid this. One is to learn technical analysis, invest in coins that no one is talking about before they are talking about them. Although this might be a bit too complex for a beginner.

The second solution is to be patient and wait for the dips and, to be disciplined enough not to invest at all-time highs, understanding that when a coin is at an all-time high it is usually a sign that it will experience a pull-back sometime soon.

2. Investing more money then you can afford to loose.

Photo by Melanie Wasser

You really need a strong stomach to invest in cryptocurrencies- it is not for everyone. There will be days or even weeks when your investment may be down by 20 to 50 percent. There are so many people that look at this market when everything is rose-tinted and put way more money then they should, only to panic sell as soon as the markets pull back by 20 percent. It is an incredibly volatile market and if you invest your life savings you are not going to sleep easily when the whole market is experiencing a serious pullback.

The best way to avoid this is to always start with an amount that isn't going to destroy you if you lose it and to spread your portfolio so that your investment is not just reliant on what one coin might or might not do. This will be a lot better for your health and wellbeing and will result in you making a lot smarter decisions overall.

Remember, the more emotionally attached you are to the money you have invested, the more likely you are to make the wrong decisions.

3. Basing your decisions on breaking news and misleading headlines.

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If you base your decisions on what everyone else is doing, you are sure to lose. There are barrel loads of fake news and misleading headlines that are aimed at making people lose confidence in crypto-currencies and make rash decisions based on FUD - Fear, Uncertainty, and Doubt.

A recent example of news outlets spreading FUD was the news that South Korea was going to introduce an outright ban on crypto-currencies. Headlines like 'South Korea Preparing Full Crypto Exchange ‘Ban’ and South Korean Banks Drop Crypto Accounts as Government Plans a Ban' turned out to be exaggerations at best, and deliberate manipulation at worst.

In reality, South Korea was planning on introducing more regulations for exchanges, which is potentially a good thing for cryptocurrencies as it makes them more legitimate for investors! It is even alleged that South Korea's government sold their bitcoin just before announcing the crackdown.

The important take away from all this is not to base your decisions on breaking news. You should investigate news further, remain calm and take everything with a pinch of salt. There are a lot of possible ulterior motives to why FUD is spread and if you are not aware of this it will end up being costly.

4.Buying coins simply because they are 'cheap'.

Photo by Arthur Osipyan

Everyone loves cheap stuff, right? So why on earth would you invest in Etherium that is currently worth over $1,000 or bitcoin that is currently over $12,000, when you can get a coin under $0.01, you may ask yourself.

The problem is, there is no such thing as a 'cheap coin'. If you are looking at the cost of coins to make your decisions, you are not making good decisions as the price has nothing to do with its value. Sure, you can get 58 million bunny coins for $1,000 but only 0.079 bitcoins, but that doesn't mean an investment in bunny coins is going to get you more money in the long run than an investment in bitcoins.

Forget about the price of an individual coin, and do your research into the long-term potential of the technology that the coin and the team it are offering. I know it's tedious and time-consuming to do this research, but going in blind on an investment will only lead you off the cliff sooner or later.

5. Initial Coin Offering (ICO) fraud.

Photo by Chris Barbalis

An ICO is when a new cryptocurrency is launched to investors. Investing in ICO's can be very rewarding, as getting in before it becomes big will always be the best way to make the highest returns. However, as with most things, where you can make the most money is also where you can lose the most money.

ICO's are unregulated and full of scams, so it really isn't something you should ever do without spending a lot of time researching and deliberating whether it is legitimate and has potential. It isn't something I'd recommend for people new to the cryptocurrency space due to the amount of knowledge you have to have about this market.

If you do invest in an ICO, research the company inside and out: Read the whitepaper, look into the team and their background, make sure it is a registered company and research the potential of the idea. Angel investors will have a team of people getting to the bottom of the potential and fundamentals of start-ups pitching for their investment, but even so, 90 percent of the startups will fail, so tread lightly when investing in an ICO.