5 Costly Cryptocurrency Investing Mistakes and How To Avoid Them

With a market cap exceeding $2.6 trillion as of April 2025, cryptocurrencies are no longer niche. In 2024, Bitcoin outpaced traditional assets like the Nasdaq Composite, gold, and the S&P 500drawing in retail and institutional investors alike.

But while the rewards of investing in crypto can be great, so are the risks. Crypto markets are volatile, and scams abound. To invest wisely, it’s crucial to understand crypto’s common pitfalls and how to avoid them.

Key Takeaways

• Cryptocurrency offers strong potential returns, but comes with high risks such as volatility.
• Research every asset thoroughly, including its founders, goals, and white paper.
• Store crypto securely, whether via centralized exchanges or offline wallets.
• Never invest more than you can afford to lose, and diversify your portfolio.

5 Common Cryptocurrency Investment Mistakes

First, let’s address the digital elephant in the room: while there have been many stories over the years of individuals becoming instant millionaires because of their crypto investments, experts, including Anna Stone, co-founder and COO at crypto risk hedging platform Cork, stressed that these are the exceptions, rather than the rule. She added that investing in crypto will carry the same principles as any other investment.

“At a high level, it’s smart that you’re thinking about diversifying your portfolio. It definitely should include digital assets,” she said. “However, you should be managing your crypto portfolio as part of a broader personal finance and investing strategy. And within that, the same principles really do still apply.”

1. Lack of Research 

Like any other investment, you should understand the ins and outs of the company or asset you’re backing with your hard-earned money. These issues are magnified when it comes to crypto, because not only do you have to understand the actual asset you’re investing in, but also how you will actually invest in it.

“How are you planning to hold crypto? Go through Fidelity and hold an ETF? Are you going through a centralized exchange where they’re acting as your custody partner?” Stone asked. “Or are you engaging? Are you not just holding crypto as an investment, but are you a crypto user? Are you actually using the blockchain to buy and hold different assets?”

Once you’ve settled these questions, the next step is to evaluate an individual asset, whether it’s a blue chip crypto such as Bitcoin or Ether or a meme coin, which aren’t necessarily tied to specific projects, such as Dogecoin.

It’s at this stage where you’re acting almost like a venture capital investor, said Roland Chow, a financial planner and portfolio manager at Optura Advisors.

“It’s a frontier kind of investment. You want to evaluate the team. You want to evaluate what they’re doing, what’s their vision,” he said. “Usually, they publish a white paper, which started with the precedent of Bitcoin. You want to understand their white paper. What is the problem they’re trying to solve?”

2. Ignoring Market Volatility 

Experienced investors expect certain markets to be volatile during certain periods of time. For example, during key events such as elections, stock markets may swing up or down. Typically, volatility is considered any swing greater than 1%.

“We can’t predict in a year’s time whether the stock market will be up or down, and we can’t predict by how much,” Stone said. “Crypto is exactly the same. It’s just that the volatility index is actually more pronounced.”

Crypto markets can see swings of 10%, 20%, or even 30% within a short period of time. You must be prepared to lose any money that you invest.

For that reason, “One of crypto’s terms is HODL, ‘Hold on for dear life,’” Chow said. Volatility “plays on fear and greed. That compounds the risk of you doing stupid things.”

Market volatility is why investors approaching retirement age are recommended to put their money in less risky assets, such as bonds, which typically don’t see large fluctuations in price, compared to more risky assets such as stocks. Seeing an asset lose its value within a short period of time can be frightening and lead less experienced investors to prematurely sell and lock in their losses. 

Tip

If you’re interested in investing in crypto and have found an asset you believe will grow, you must be prepared to stay the course in the face of losses.

3. Falling for Scams 

Any new area that sees a lot of economic activity will also attract bad actors looking to defraud people out of their money. Crypto is no exception.

Note

According to the FBI, losses related to cryptocurrency fraud totaled more than $5.6 billion in 2023, a 45% increase from the year before.

The most common crypto scams are investment fraud, where typically overseas bad actors use various methods to manipulate victims to send money for what turn out to be fake investments.

“As a result, victims typically lose everything they invested,” the FBI said.

There is also the concept of a so-called “rug pull.” In these situations, a project—which may have started out legitimately—will attract investment, but its principals will cash out their shares before delivering on their promises. Any investors who didn’t cash out in time are typically left with near-worthless shares.

4. Overinvestment 

Investing in the markets can be a savvy financial move to grow your wealth, but there’s an equal chance of you losing all your hard-earned money. For that reason, you shouldn’t invest any funds that you need to pay your rent and bills or buy food.

“This is the same principle that would apply to how you manage any other sort of portfolio, which is that you need to think about how much am I investing versus how much cash do I need to have on hand?” Stone said. “What would my plan be in terms of exiting these positions and understanding that for crypto, returns will balance out over a longer timeframe, the same way you would take a longer time frame into account when you’re thinking about the S&P, the Nasdaq, anything like that.”

With any money that you’re investing, you should be prepared to lose it all. Chow recommended that for the average person, 5% to 10% of a portfolio should be crypto. For this reason, it’s also important to diversify your investments. In this way, if one segment of your portfolio drops in value, you’re protected by holding assets in a different segment. For example, that could include tech stocks, energy stocks, and various types of crypto.

5. Neglecting Security Measures 

While day trading platforms have simplified the act of investing, holding crypto is not so simple. There’s the concept of custody, where a common phrase is, “not your keys, not your crypto.” That means that unless your digital assets are held on a hardware wallet (many of these resemble a USB stick and are protected by a password) not connected to the internet (known as cold storage), you don’t really have full control over them.

That said, there are many centralized exchanges, including Coinbase, Binance, and Kraken, that will allow you to buy crypto and handle custody for you. This isn’t a cure-all, as we saw with the implosion of FTX and the subsequent arrest of its founder, Sam Bankman-Fried. In that case, FTX promised to secure its users’ crypto but instead used their money to fund investments by its executives.

Important

To keep your crypto secure, you must either invest in a secure wallet or put your trust into a centralized exchange, preferably one regulated by the government.

How To Avoid These Mistakes

Conduct Thorough Research 

There are a lot of intricacies to crypto. While you don’t have to be an expert at blockchain to back a meme coin, you should have a general understanding of how the technology works. It’ll also be prudent for you to understand the goals of the crypto space, as many proponents of the technology aim to upend fiat-based, central bank-led finance with one that is decentralized, open, and immutable (meaning transactions can’t be changed).

“In a sense, crypto represents this movement of essentially losing trust in the centralized solution,” Chow said. “The other side is just people who want to make money.”

When researching a cryptocurrency, keep this larger context in mind as you evaluate the people behind the project, what technology solutions they’re putting forward, and what their goals are. Read any materials such as the project’s white paper, look into the credentials of their founders, and review their social media posts.

Manage Risk and Volatility 

As mentioned, crypto sees even more volatility than the stock market, so don’t put all your eggs in one basket, or you may end up losing everything. Diversify your portfolio to stem your losses, meaning not only investing in different kinds of assets, from stocks, bonds, to crypto, but also a range of different crypto assets, from blue chips, meme coins, to those backing a range of projects.

“Your mindset is really critical in terms of managing risk—being really clear with yourself around: What’s my timeframe? Am I expecting to see a profit within a week? Within a month? Within a year?” Stone said. “We have the standard trading tools, but no one can tell you what’s the right tool to use without you having your investment strategy set up.”

Knowing this will make it easier to establish rules around your crypto investments, including setting stop-loss orders. These orders essentially establish a floor that will trigger a selloff. Let’s say you bought a meme coin at $8 a piece. If you set a stop loss order at $5, the system will automatically sell your shares at that price.

Chow said to be careful when setting these limits, as crypto tends to bounce back quickly. If you sell prematurely, you may miss out on gains. He recommended setting stop-loss orders based on the historical volatility of the asset.

“For instance, if you’re trading something that doesn’t move around quite a bit, your stop losses can be tight,” he said. “If you’re trading something super volatile, to have a chance of making money and not get stopped out every time, you have to wind those stop losses.”

Identify and Avoid Scams 

Doing research on each asset you’re interested in investing in will go a long way toward rooting out the legitimate projects from the scams. Common sense can take you far.

“If something seems to be too good to be true, it probably is,” Stone said. “Anything that promises you something that’s certain, that’s risk-free, it’s an immediate Spidey sense.” 

With that said, there are instances of projects that do carry a higher risk but with the potential for higher returns. That doesn’t mean they are scams.

“It just means that these are risks that you need to be aware of,” Stone said.

Note

If you’re investing in crypto through a centralized exchange or a traditional brokerage, these entities likely have already done the research and validated each crypto project they offer for trading.

Set Investment Limits 

Quite simply, if you can’t afford to lose the money you are investing, you should not invest it in the first place. Instead, plan your budget out, then set aside some funds for digital assets. It doesn’t have to be a large amount. You can start with $100, experiment with different assets, and see how it goes.

As Stone stressed, it’s also important to have a timeframe in mind. Whether it’s a week or a month, evaluate how your investments are doing and have a plan in place. For example, if your assets appreciated, perhaps you can withdraw some of your earnings and set it aside, either as a backup fund or to invest in other assets.

Implement Strong Security Practices

There are multiple methods to invest in and store digital assets. If you do opt to get a hardware wallet, make sure you protect it with a passphrase. Store both the device and passphrase in a safe place, such as a safe deposit box. You don’t want to be in a situation like the one James Howells found himself in, in which he threw away a hard drive said to hold about $800 million in Bitcoin.

If you opt to use a centralized exchange, utilize extra security methods such as two-factor authentication. With this system, a temporary code is sent to an account holder to prevent logins by bad actors.

What Are the Most Reliable Sources for Cryptocurrency Research?

Some of the best introductory sources for cryptocurrency research come from the exchanges themselves, such as Coinbase, Kraken, and eToro. These companies’ websites will teach you the basics of crypto and offer deeper dives into various subjects. 

CoinMarketCap, which pulls data from multiple sources, provides a great overview of assets based on value and trading volume. Finally, X (formerly Twitter) and YouTube are go-to resources for those active in the crypto space. For example, Chow recommends the channel of Raoul Pal.

What Are the Tax Implications of Cryptocurrency Investments?

According to the IRS, “You may have to report transactions with digital assets such as cryptocurrency and non-fungible tokens (NFTs) on your tax return. Income from digital assets is taxable.” Find more information on this IRS website.

The Bottom Line

Cryptocurrencies offer the promise of great potential gains for savvy investors, but digital assets also come with many risks, including volatility and scams. If you’re interested in investing in these assets, make sure you conduct research, set and understand goals, and be prepared to lose money.