Mistake 1 – Believing Exchange Order Books
Coinbase, the largest trading venue, undoubtedly has the best reputation among the exchanges. The exchange has been registered as a Money Services Business with FinCEN since 2016 and was issued an e-money license by the United Kingdom’s Financial Conduct Authority (FCA) in early 2018.
Despite multiple accusations of market manipulation and insider trading, there was no concrete evidence until March 2021. The company settled for $6.5 million with CFTC over Litecoin (LTC) trading manipulation. Investigations on other cryptos still remain open.
Even if the exchange is clean, there is no guarantee that a market maker or arbitrage desk hasn’t been using multiple accounts belonging to the same entity, known as ‘wash trading.’ Now, this isn’t just a Coinbase issue, many exchanges have operated underhanded techniques to generate more profit.
How to overcome it? Don’t make investment decisions exclusively based on price charts from a single source. Always ensure that the data matches across multiple independent websites.
Mistake 2 – Assuming that Stablecoins are Used for Buying Cryptocurrencies
Yes, Tether issuing had a high correlation with market rallies in the past, but that hasn’t been true in 2021. Instead, holders could be using it on decentralized finance (DeFi) or crypto lending services such as Nexo, Crypto.com, or Celsius.
There’s also the possibility that some Tethers hold zero relationship to crypto, maybe Chinese or Russian investors looking for non-censurable U.S. Dollars. Whatever the reason, the astonishing growth of stablecoins in 2021 bore no relation to the market performance.
How to overcome it? Ignore the data. If the correlation eventually comes back, then consider using it again.
Mistake 3 – Use a Tight Stop Loss
There isn’t a single market in the world whose volatility can be comparable to cryptos. 150% volatility is not uncommon for Bitcoin and altcoins, while the vast majority of the SP500 names hardly ever surpass 75%.
Therefore, any indicator or trading technique that has ever been written needs to be adjusted for crypto trading. For example, using a stop loss lower than 12% or 13% on an asset that holds 7% daily volatility means certain death.
Mistake 4 – Ignoring Bitcoin when Trading Altcoins
It doesn’t matter if your altcoin trades exclusively on USD Tether (USDT) pairs or however unrelated the project is to Bitcoin. When the king is facing a bear market, you can be reasonably sure that altcoins will suffer.
The only moment that altcoins usually decouple is when Bitcoin stabilizes after a massive rally. That’s when investors seek alt season moments, pumping their bags before the leading crypto makes another move.
How to overcome it? Always check Bitcoin charts first, including daily and weekly timeframes.
Mistake 5 – Late Entries Caused by FOMO
Some random altcoin has been pumping for 5 days in a row, accumulating 120% gains. The chatter on groups and social networks becomes unbearable, and everyone is posting bullish charts. There might even be some random pundit on CNBC showing how easy it is to buy it.
That’s when traders cede to FOMO, the Fear of Missing Out, and a typical top signal. Sure, there might be another 20% or 40% upside, considering traders are overly excited, but more often than not, the trend reverses in a few days.
How to overcome it? Don’t get upset for missing clear buying signals. If you’re too late for the trade, make sure to search for similar patterns in the future.