How to avoid losing money trading with Bitcoin and Cryptos

For every crypto-investors who get rich, there are hundreds who are losing their capital. Most common trading mistakes can be avoided by following some simple rules.

Some months ago, I met a guy who was very passionate about cryptocurrency. At that time, I was not much involved in crypto-investment. I am a trader but I trade only asset I know very well.

The guy started trading long time ago and he seemed to have a broad knowledge of the market. So, I asked him if it was one of the lucky guys who made a fortune trading Bitcoin at the end of 2017.

His answer puzzled me. He stated that he actually made around ten thousand dollars when he sold his Bitcoins, but it was the beginning of September 2017. At the end of December 2017, he had some friends who eventually got rich because they kept investing in Cryptos and sold them right at the top.

So, his ten thousand dollars were peanuts compared to couple of millions made by his friends. I could sense a feeling of frustration within him. It is in our human nature to focus on what we don’t have rather then on what we have.

The worse thing is that he kept investing on cryptos trying to reach the same results of his friends. But it was too late. We know the story. On January 2018 the crypto bear market started. From his point of view Bitcoin and Ethereum were safe asset (!) and they would have risen again, so he kept on accumulating positions as the market was going down.

One of the first rule of a trader is to cut losses and let profits run. He obviously did not know it. The result was that he gave back to the market what he initially gained. But he was positive on the outlook and he kept his positions. This happened at the end of March 2018. I wonder how his portfolio looks like now…

This story thought me a lot.

First of all, people have a sense of urgency in becoming millionaires. Rich people have money because they constantly work toward success. They have a plan and don’t take decisions based on emotions. They work hard and smart consistently. Successful athletes for example do not suddenly emerge. They have been working for years and years on their craft to reach their current point. In the classic of literature “Think and grow rich”, Napoleon Hill asserts that desire, faith, and persistence can propel one to great heights if one can suppress negative thoughts and focus on long-term goals. When I see Elon Musk on TV, I see a guy who is passionate and enthusiastic about what he is doing. He works hard (they say 120 hours per week) and he achieve results. This creates a state of positive energies in the mind. In this situation, negative feelings do not have the power to emerge.

Being rich is a state of mind rather than a condition. One of best book I have ever red is “Poor dad, Rich Dad” by Robert Kiyosaki. The book talks about how important is to have a financial education. Unfortunately, this is one of the things (among many others) which they don’t teach us in school. Money management should be one of the subjects along with literature, history and math. Mr. Kiyosaki says rich people have the power to accumulate money, poor people to waste them. If you give 1M dollar to somebody who has not the proper investing mental attitude, he would probably spend all his money in things that do not generate additional income and lose them in short time.

It is crucial to mitigate risks. I have talked with many investors about cryptos. Most of them do not have any position in the crypto-market yet. While ICO based VCs are emerging, investors are still skeptical because it is still a highly un-regulated world. Some of them have a small percentage of their capital invested in crypto. They usually invest in the equity of the company rather than buying tokens that do not give any guarantee that the company will deliver the product they promised. All of them mitigate risks by diversifying their portfolio. If you want to be successful in investments, you need to have strategy and to manage risks. This is what it is recommended in the book “The intelligent asset allocator” by Willam Bernstein. We should always evaluate the risk associated with every decision we make. When we take an investment decision, we should think about the worst situation. If the worst situation happens, we should be able to sleep well during night anyway. If we think it won’t be sustainable for us to lose 30% of our capital (or more) then we should not take that investment.

Sometimes I wonder if my friend was able to stop the train wreck before it was too late. With the correct education and tools, he would have been able to develop a trading plan. With no plan it is difficult to survive in this world as everything is left to emotional and reactive trading.

How to avoid losing money trading with Bitcoin and Cryptos was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.