Bitcoin is trending upward again, with the cryptocurrency briefly topping the $60,000 mark for the first time ever on Saturday. As recently as September 2020, one bitcoin was worth just over $10,000, and the recent rally has prompted more investors to get into crypto for the first time.
But many new investors are jumping feet first into the volatile crypto market without being fully aware of what they're getting into. CNBC Make It spoke with Adam Traidman, CEO and co-founder of BRD, a popular crypto wallet that boasts more than 7 million users, about the biggest mistakes he sees newcomers making, as well as some tips to avoid them.
They're surprised by bitcoin's volatility
Bitcoin is prone to major valuation swings as whales — the term for large institutional investors — buy and sell massive quantities. New investors should go in with clear eyes and brace themselves for major dips and spikes.
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Traidman says that anyone considering buying bitcoin should get familiar with its movements so as to not get scared into selling their holdings if they see a drop soon after they buy.
"[When bitcoin broke] $50,000, a bunch of new people bought in, and then you had savvy whales who took their winnings and caused a pullback," he explains. "And then some spooked investors sold, and the whales bought back in [at a lower price]."
New investors should strive to be unfazed when they see major movements, whether they're positive or negative, Traidman says.
"Be aware that if you put in X amount of money, there will be a time when you open your wallet and are down 30%," he says. "There will also be a time when you're up 2x."
They don't go in with a plan and let themselves get greedy
One of the most important things a new crypto investor can do is know their goals. Too often, Traidman says, new investors get enamored by quick increases in the value of their holdings and decide to see if it goes up any more. Instead, they should sell if they hit their targets.
"When you have a situation where your money is up 2x or 3x, you'll think that it was too easy," he says. "Stick to your guns and don't get greedy. If your goal is 2x [growth], and you hit that, sell it and be thankful that you hit your number."
He adds that new investors often get caught up in the day-to-day fluctuations of the coin. A better strategy, Traidman argues, would be to "buy, hold and forget about it" for at least a year.
"If you look at it every day, it can be nerve-wracking," he says. "We crypto crazy people do that, but I don't think it's the right move for the average casual investor."
They try to time the market
One of the biggest mistakes Traidman sees new investors making is trying to wait to buy bitcoin at the cheapest price possible, only to get upset if it goes even lower after they make their purchase.
To avoid this, Traidman advises new investors to use the dollar-cost average strategy — buying a little bit of bitcoin every day at a wider range of prices — to build their holdings over time.
"Don't just go in and buy $5,000 worth of bitcoin," he says, adding that it is more helpful psychologically to not have a single price at which you bought bitcoin that your brain fixates on.
He adds that there's no amount of bitcoin a person can buy that makes it a good or bad investment, and that investors should only buy as much as they're comfortable losing if its value were to drop.
They get sucked into the world of altcoins
New investors who find themselves having luck with their bitcoin investments may begin wondering about the other digital tokens available to purchase on their wallets. In recent months, cryptocurrencies like dogecoin have become popular with investors and piggybacked on the bitcoin wave.
Traidman admits that BRD makes getting into the world of altcoins "highly tempting" because they're placed front and center next to bitcoin. But he advises novices to stay away.
"Companies like BRD, Coinbase and others make it really easy to make additional investments by using your bitcoin to buy them. If you thought bitcoin was volatile, these other coins can be orders of magnitude more volatile."
Unless you're willing to put in the time and research to understand what you're getting yourself into, it would be wise to stick with bitcoin and its institutional support. Even currencies like ethereum, which has similarly seen a large rally in recent months, shouldn't be considered a safe bet for novice bitcoin investors.
"The reasons why bitcoin might go up and the reasons why ether might go up are completely different, but most people don't realize that," Traidman explains.