Common Mistakes to Avoid When Using Crypto Exchanges

If you’re using crypto exchanges but don’t want to fall into the common mistakes people make often, you’re in the right place.

Whether you’re trading or investing in cryptocurrencies, knowing these common mistakes can save you from a lot of financial trouble down the line.

None of us want to lose our hard-earned money, right? So, this is a must-read.

Now, join me as I show you how to use crypto exchanges like a pro.

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Mistakes to Avoid When Using Crypto Exchanges

Here are some common mistakes to avoid when using crypto exchanges:

1. Relying Solely on Exchange Wallets for Long-Term Storage

While exchange wallets offer convenience, they are not designed for the secure, long-term storage of cryptocurrencies.

Here’s why relying solely on crypto exchange wallets can be a costly mistake and what you can do to protect your investments:

Why It’s Risky:

Hacking and Security Breaches: Crypto exchanges are prime targets for hackers due to the vast amounts of funds they hold. High-profile breaches, such as those of Mt. Gox and Bitfinex, have resulted in the loss of millions of dollars worth of cryptocurrencies. If an exchange is hacked, your funds stored in its wallet can be stolen, often with little chance of recovery. Even reputable exchanges are not immune to sophisticated cyberattacks.
Exchange Insolvency: The history of the crypto market is littered with instances of exchanges suddenly shutting down or declaring bankruptcy. When this happens, users often find themselves unable to access their funds or receive refunds. Leaving funds on the exchange means you’re at the mercy of its financial stability.
Limited Control: When you store your cryptocurrencies on an exchange, you do not have control over the private keys. Essentially, you are trusting the exchange to manage and secure your coins. Without control of your private keys, you rely entirely on the exchange’s security protocols and operational integrity. “Not your keys, not your coins” is a popular adage in the crypto community that emphasizes this risk.

How to Protect Your Investments:

Use Hardware Wallets: Hardware wallets are physical devices designed to securely store your crypto offline. Because they are offline, hardware wallets are immune to online hacking attempts, providing a high level of security for your long-term holdings.
Diversify Storage Methods: Spread your cryptocurrencies across multiple exchanges and mobile wallets. Diversification reduces the risk of losing all your cryptocurrencies in a single breach or failure.

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2. Ignoring Fees

Crypto exchanges charge various fees for their services, including trading fees, withdrawal fees, deposit fees, and more.

These fees can add up quickly, especially if you’re an active trader or frequently move your funds.

Why Ignoring Fees Is a Mistake:

Trading Fees: Exchanges charge fees for each trade you make, typically as a percentage of the trade value. These can vary widely between platforms and even within the same platform, depending on your trading volume or membership level. Frequent trading can accumulate significant fees, reducing your overall profit. For example, a 0.25% fee per trade might seem negligible, but if you’re making multiple trades daily, it can quickly add up.
Withdrawal Fees: These are fees charged by exchanges for transferring your cryptocurrency to an external wallet. The fee can be a flat rate or vary based on the network congestion. High withdrawal can cut into your overall returns, making it less cost-effective to move your funds.

How to Manage and Minimize Fees:

Compare Exchange Fees: Research and compare the fee structures of different exchanges before choosing where to trade. Look at trading fees, withdrawal fees, and any other charges that might apply. Selecting an exchange with lower fees can save you money over time, especially if you’re an active trader.
Use Exchange Tokens: Some exchanges have their own tokens that when used to pay for fees, can offer discounts. For example, Binance has BNB, which provides reduced fees if used within the Binance exchange.
Stay Informed About Network Conditions: Monitor network conditions and plan your transactions during times of lower congestion, as making transactions during times of high network traffic causes higher fees.

Read Also: How to Choose a Crypto Exchange

3. Neglecting to Use Stop-Loss Orders

Stop-loss orders act as your safety net in the volatile world of cryptocurrency trading.

They allow you to set a predetermined price at which your crypto will be automatically sold, helping you limit potential losses.

Let me break it down with an example:

Imagine you’ve invested in a cryptocurrency that’s been performing well. However, news of a regulatory crackdown sends shockwaves through the market, causing prices to crash.

Without a stop-loss order in place, you’re left vulnerable to huge losses as the price continues to drop.

But with a stop-loss order set at a strategically chosen price point, you can minimize your losses by automatically selling your crypto before the crash worsens.

This proactive approach to risk management can help protect your hard-earned gains and preserve your capital for future opportunities.

Neglecting to use stop-loss orders is a mistake that can leave you vulnerable to huge losses in crypto trading.

So, don’t wait until it’s too late – set those stop-loss orders and trade smart!

4. Using Public Wi-Fi or Insecure Networks

Using unsecured networks can expose you to various cyber threats that can compromise your financial security and personal information.

Here’s why it’s a risky practice and how you can protect yourself:

Why It’s Risky:

Man-in-the-Middle Attacks: In a man-in-the-middle (MitM) attack, a hacker intercepts the communication between your device and the internet. They can capture sensitive data such as login credentials and other personal information. Once attackers have your login credentials, they can access your exchange accounts, steal funds, and potentially wipe out your entire investment.
Fake Wi-Fi Networks: Cybercriminals can set up fake Wi-Fi networks (often called “evil twins”) that mimic legitimate networks. When you connect to these networks, all your internet traffic is routed through the attacker’s device. Any information you send or receive while connected to the fake network can be stolen, including exchange logins and private keys.

How to Protect Yourself:

Use a VPN: A VPN encrypts your internet traffic, making it much harder for hackers to intercept and read your data. Subscribe to a reputable VPN service and ensure it’s activated whenever you access your crypto accounts over public Wi-Fi or any unsecured network.
Enable Two-Factor Authentication: 2FA adds an extra layer of security by requiring a second form of verification in addition to your password. Enable 2FA on all your crypto exchange accounts. Use an authentication app like Google Authenticator or Authy rather than SMS-based 2FA for enhanced security.
Avoid Public Wi-Fi for Sensitive Transactions: Whenever possible, avoid accessing your crypto accounts or conducting transactions over public Wi-Fi. Use your mobile data or a secure, private network instead.
Check Network Legitimacy: Before connecting to a public Wi-Fi network, verify its legitimacy with the establishment offering it. Avoid connecting to networks with generic names like “Free Wi-Fi” or those that do not require a password.

5. Trading Without Understanding Order Types

Order types dictate how trades are executed on a cryptocurrency exchange, influencing factors such as price, timing, and execution method.

By familiarizing yourself with the most common order types, you can make more informed trading decisions and navigate the market with confidence.

Here’s why trading without understanding order types can be a mistake:

Suboptimal Execution: Without knowledge of order types, you may default to using market orders, which execute immediately at the current market price. While market orders offer convenience, they can lead to suboptimal execution, especially in volatile markets where prices can fluctuate rapidly. By understanding order types like limit orders and stop orders, you can exert more control over your trades and potentially achieve better prices.
Risk of Overpaying: Market orders can result in overpaying for coins if the order book lacks liquidity or if there’s significant price slippage. Limit orders allow you to specify the maximum price you’re willing to pay when buying or the minimum price you’re willing to accept when selling, helping you avoid paying more than intended.

To trade effectively and mitigate risk, it’s crucial to understand the following common order types:

Market Orders: Market orders execute immediately at the current market price, but offer limited control over execution price.
Limit Orders: Limit orders allow you to specify the maximum price you’re willing to pay when buying or the minimum price you’re willing to accept when selling. They offer more control over execution price but may not fill immediately if the specified price isn’t met.
Stop Orders: Stop orders trigger a market order when a specified price level is reached. Stop-loss orders help limit losses by selling cryptocurrencies when prices fall below a certain threshold, while take-profit orders lock in profits by selling cryptocurrencies when prices reach a predetermined target.

6. Trading Without Adequate Knowledge or Experience

Picture yourself stepping onto a Formula 1 racetrack without knowing how to drive.

Similarly, going into crypto trading without sufficient knowledge or experience can lead to disastrous results.

While the allure of quick profits may be tempting, the risks of trading without a solid foundation are immense.

Why Trading Without Adequate Knowledge or Experience Is a Mistake:

Lack of Market Understanding: The crypto market is complex and highly volatile, influenced by a myriad of factors, including regulatory news, market sentiment, news events, and technological advancements. Without a solid understanding of these dynamics, new traders can easily make poor decisions, such as buying into hype-driven pumps or panic-selling during dips, resulting in huge financial losses.
Inadequate Risk Management: Effective risk management involves setting stop-loss orders, determining position sizes, and diversifying investments to protect against significant losses. Novice traders often neglect these essential practices, risking too much on a single trade or failing to cut losses early, which can lead to devastating financial consequences.
Inability to Perform Technical Analysis: Technical analysis involves analyzing historical price data and chart patterns to predict future price movements. Trading without the ability to perform technical analysis leaves traders vulnerable to making impulsive decisions based on emotions rather than sound analysis, increasing the likelihood of losses.

How to Build Knowledge and Gain Experience:

Educate Yourself: Start with the basics of cryptocurrency and blockchain technology. Read books, follow reputable news sources, and take online courses to build a strong foundational understanding. A thorough education helps you understand market mechanisms, trading strategies, and the technology behind cryptocurrencies, enabling more informed decision-making.
Practice with Demo Accounts: Many trading platforms offer demo accounts where you can practice trading with no money. Using a demo account allows you to experiment with strategies, understand market movements, and gain confidence without risking real funds.
Start Small: Start trading with small money and gradually increase your exposure as you gain more experience and confidence. Starting small limits your potential losses and allows you to learn from mistakes without significant financial impact.

Here’s How to Start Trading Cryptocurrency Successfully

7. Overleveraging

Imagine placing a bet that’s 10 times more than you can afford, hoping to double your money quickly. If things go well, you win big, but if they don’t, you could lose everything and end up in debt.

This scenario illustrates the risk of overleveraging in crypto trading.

While leverage can increase potential profits, it also magnifies losses.

Why Overleveraging Is a Mistake:

Increased Exposure to Market Volatility: Leverage allows you to control a large position with a small amount of capital. For instance, with 10x leverage, a $1,000 investment can control $10,000 worth of cryptocurrency. And since cryptocurrencies are notoriously volatile, small price movements can lead to large gains or losses when leverage is involved. A 10% drop in a crypto price can wipe out your entire investment if you’re using 10x leverage.
Margin Calls and Liquidation: When the market moves against your leveraged position, exchanges may issue a margin call, requiring you to deposit more funds to maintain the position. If you can’t meet the margin call, your position will be liquidated to cover the losses. Liquidation means you lose your initial investment, and in some cases, you might even owe more than your initial capital, leading to financial distress.

How to Manage and Avoid the Risks of Overleveraging:

Understand Leverage: Before using leverage, ensure you fully understand how it works, including margin requirements, liquidation processes, and potential risks. Understanding leverage helps you avoid taking on more risk than you can handle, reducing the likelihood of catastrophic losses.
Use Lower Leverage Ratios: Start with lower leverage ratios, such as 2x or 3x, to minimize risk while still benefiting from leverage. Lower leverage reduces the risk of rapid liquidation and gives you more room to manage trades effectively.
Set Stop-Loss Orders: Implement stop-loss orders to automatically close your position if the market moves against you by a certain percentage. Stop-loss orders help limit potential losses and protect your capital by ensuring you exit losing positions before they become too large.

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Common Mistakes to Avoid When Using Crypto Exchanges

DISCLAIMER:

The information provided here is intended for informational purposes only and should not be solely relied upon for making investment decisions. It does not constitute financial, tax, legal, or accounting advice. Additionally, I strongly recommend that you only invest in cryptocurrency an amount you are comfortable with potentially losing temporarily.