Tips on Avoiding Financial Ruin in the Crypto Market

Table of Content

Introduction
What Does Getting REKT Mean?
Tips to Avoid Getting REKT
Examples of Getting REKT
Conclusion

Introduction: What Does Getting REKT Mean?

In recent times, decentralized finance (DeFi) and crypto trading have become extremely popular, with great prospects of making profits and also of losing huge sums. Some investors have made huge amounts with little investment while some have lost a fortune from bad trades. Essentially, the crypto market can be a blessing and at the same time a curse. The image below speaks volumes!

_{Source: Hackernoon.com}

The term “REKT” was derived from the word “wrecked,” and was first used within the online gaming community to describe a a player (or team) that lost embarrassingly. In the crypto space, it means losing a lot of money or becoming financially ruined as a result of huge trading losses.

Getting ‘REKT’ can happen to any trader and at any time due to several reasons such as investing in ‘rugpulls’, buying at the peak of a market cycle, overleveraging, ‘apeing’ into a scam project without due diligence, etc.

The consequences of getting REKT can be very devastating, and it can take a long time and a great deal of energy to recover from such losses. So, how can you avoid getting REKT in DeFi? In this article, l will discuss some tips that can help you minimize your risks and increase your chances of success no matter the market condition. However, this is a beginner’s guide to ensure that your investment journey is on track, and is by no means exhaustive. Let’s dive in!

Tips to Avoid Getting REKT

_{Source: CapitalRollup}

Understanding the Basics

Before investing in DeFi or buying any crypto asset, it is essential to understand the basics of decentralized finance (DeFi), by first learning about blockchain technology upon which DeFi protocols operate, understanding how DeFi works, and the technicalities involved. Most importantly learn how to trade the various trading options such as spot, margin, derivatives, and leverage on both centralized and decentralized exchanges.

However, having a good understanding of DeFi and crypto trading reduces the likelihood of getting REKT but doesn’t eliminate the possibility.

Do Your Own Research (DYOR)

_{Source: Divi Project Tweet}

DYOR is a popular term in the crypto space and often entails the process of studying a project’s foundations before investing in it.

When researching a crypto or DeFi project, investors should look into several crucial areas, that’s the project’s use case, tokenomics, medium to long-term plan, team members’ backgrounds and track records, past successes, and failures, and community involvement. Also, check their social media channels, and see who they have partnered with. These are worthwhile starting points to investigate.

In essence, researching a project will give you a better idea of its potential, and enable you to make informed choices. You can use either of these crypto research tools to carry out your research; TradingView, Messari, Glassnode, Cryptowatch, CoinMarketCap, Coingecko, etc.

Additionally, do not buy a coin based on social media or influencer hype or on fear of missing out (FOMO). Even if you must, research about the project or token and always seek expert guidance preferably a cryptocurrency financial advisor.

Diversify Your Portfolio to Spread out Risk

Diversifying your crypto portfolio is another essential tip to avoid getting REKT. Investing in a single asset or project can be risky, as it increases the chance of losing all your money, hence the saying; ‘don’t put all your eggs in one basket’. By diversifying your portfolio, you spread the risk across different assets, and if one project fails, you will not lose all your funds.

Keep Your Emotions in Check

The crypto market is highly volatile and uncertain, prices can fluctuate rapidly. One can easily become carried away by enthusiasm and act impulsively. So, it is essential to keep your emotions in check and always make rational decisions. Panic selling or buying can lead to significant losses.

Set Realistic Goals

Having a clear, objective, and well-thought-out strategy is crucial in order to succeed. Setting unattainable goals can result in frustration, and you could find yourself making impulsive decisions in an attempt to achieve them. Setting realistic goals and practicing patience are of utmost importance in a rapidly evolving crypto market.

Use Stop-Loss Orders

_{Source: financialexpress.com}

Aside from understanding market and limit orders, it is important to understand stop-loss orders to reduce losses when the price movement goes against you. A stop-loss order is a directive given to a broker to sell a security at a specified price point. Employing stop-loss orders is a reliable means of curtailing your losses and circumventing being REKT. If the price of an asset falls below a certain level, the stop-loss order will trigger, and the asset will be sold automatically.

Be Careful with Leverage

Using leverage can be a potent strategy for traders to increase their profits, however, high leverage can lead to huge financial losses. The higher the leverage the more likely your position gets liquidated. A leverage of 2 to 3X should be a good starting point.

Further, it is important to be careful with leverage and only use it if you understand the risks and the possible outcome. Also, have a well-defined plan and set stop-loss orders when using leverage.

Seek Advice from Financial Experts

Seeking advice from experts in the crypto and DeFi space can be beneficial in avoiding getting REKT. Many experienced individuals and communities are willing to share their knowledge and insights. Engaging with experts through forums, social media platforms, or attending conferences and meetups can help you gain valuable insights and make informed trading decisions.

Understanding Risks and Implementing Risk Management

Investing in cryptocurrencies and DeFi projects can be highly rewarding but also comes with significant risks. To avoid getting REKT, it’s necessary to educate yourself about the potential risks, such as market volatility, and how to discover fraudulent projects. By understanding these risks, you can take necessary precautions to mitigate potential losses.

Additionally, implementing proper risk management strategies, such as setting a budget, can help you maintain a balanced approach and avoid significant losses. Regularly reviewing and rebalancing your portfolio can also help you stay on top of potential risks and ensure that you are making informed investment decisions.

Understand what Impermanent Loss is

Impermanent loss, also known as divergence loss, is a term commonly used in decentralized exchanges (DEXs) and automated market makers (AMMs) like Uniswap, SushiSwap, and Balancer. It refers to the temporary loss of funds that liquidity providers may experience due to the volatility and price fluctuations of the assets they have provided.

For example, let’s say you deposit 1 ETH and 100 USDT into a liquidity pool. The current price of ETH is $1,000, so the value of your deposit is $1,100. Now, let’s say the price of ETH goes up to $1,200. The pool will need to rebalance itself, and it will do this by selling some of your ETH and buying more USDT. This will cause the value of your deposit to go down to $1,050.

In this example, you have incurred an impermanent loss of $50. This is because the value of your deposit would have been $1,200 if you had simply held on to your ETH and USDT. This divergence causes impermanent loss. However, the loss is not permanent. If the price of ETH goes back down to $1,000, you will be able to withdraw your original assets and you will not have lost any money.

The loss is called “impermanent” because it only occurs when liquidity is being provided. If the liquidity provider withdraws their funds when the pool ratios have returned to their initial state, they will not suffer any impermanent loss, despite the temporary value fluctuation during their time in the pool.

Impermanent loss can be seen as a trade-off for providing liquidity in AMMs, as it enables liquidity provision but exposes the provider to the risk of temporary fluctuations. It is important to consider the potential impermanent loss when deciding to participate in liquidity provision.

Secure Your Investments

_{Source: Imperva.com — The Process involved in 2FA Verification}

Security is paramount when dealing with cryptocurrencies and DeFi assets. Make sure to use strong, unique passwords for your crypto wallets and exchange accounts. Add an extra layer of protection by implementing two-factor authentication (2FA). Also, consider using hardware wallets for storing your assets offline, thus, reducing the risk of online cyber attacks. Additionally, keep an eye out for phishing attempts, suspicious links, and malware attacks.

Beware of FOMO and FUD

The crypto market can be influenced by psychological factors such as FOMO (Fear Of Missing Out) and FUD (Fear, Uncertainty, and Doubt), which can affect your decision-making process. When experiencing FOMO, you may feel pressured to invest quickly in a trending asset, whereas FUD may cause you to sell in a panic during market downturns. It is important to be mindful of these emotions and make rational choices based on thorough research and sound analysis.

Be Skeptical of Hype

_{Source: Cointelegraph.com — ICO Scams}

The crypto and DeFi space are known for their hype and buzz around new projects and tokens. While some projects may have genuine potential, it is important to be skeptical and conduct due diligence. Do not fall for empty promises or exaggerated claims. Look for projects with a strong team, clear roadmap, and real-world use cases. Most importantly, develop your risk strategy around the premise that a project will fail.

Learn Technical Analysis

Technical analysis is a tool used to analyze price patterns and predict future market movements. Learning the basics of technical analysis can help you make better-informed decisions, understand key indicators, chart patterns, and support/resistance levels. Bear in mind that while technical analysis can be useful, it is not completely reliable, and it’s advisable to consider other factors as well when making investment decisions.

However, having a good grasp of fundamental and technical analysis will enable you to make well-informed decisions, and consequently reduce the likelihood of experiencing a REKT.

Learn from Mistakes

Even with careful planning and research, losses may still occur. It’s important to view these losses as learning opportunities. Analyze your mistakes, understand what went wrong, and use these experiences to improve your future decision-making process.

Examples of Getting REKT

These are examples of investors losing huge sums due to various reasons:

Mt. Gox Hack

_{Source: cnbc.com}

Mt. Gox was a popular Bitcoin exchange that was hacked in 2014, resulting in the loss of over 850,000 Bitcoins. So many investors who had their funds on the exchange lost their entire investment.

Bitconnect Scam

_{Source: Cointelegraph.com — Bitconnect Fraud}

Bitconnect was a high-yield investment program that promised investors massive returns. However, the investment opportunity ultimately proved to be a fraudulent Ponzi scheme, resulting in significant losses for numerous investors.

ICO Scams

_{Source: Forbes — SEC Shut Down Plexcoin}

Initial coin offerings (ICOs) were popular in 2017 and 2018, but many of them turned out to be scams. For example, the Plexcoin ICO was shut down by the US Security and Exchange Commission for defrauding investors of over $15 million.

Overleveraging

In 2021, many investors overleveraged their positions in Dogecoin, a dog meme-inspired cryptocurrency, resulting in significant losses when the price of $DOGE crashed.

Conclusion

Investing in cryptocurrency can offer significant potential rewards but also involves substantial risks. However, implementing these measures can mitigate or reduce risks and enhance your likelihood of achieving success in this highly volatile market.

It is crucial to acknowledge that there are no certainties when it comes to investing, and you should only commit funds that you are willing to lose, especially when trading in margin or futures. This implies that you should avoid investing your entire life savings or incurring debt to invest. Instead, initiate your investment journey with modest amounts and steadily raise your investments as you gather knowledge and experience.

Ultimately, it is the responsibility of every investor to evaluate the rewards in comparison to the risks and make a decision on whether investing in cryptocurrency is a suitable option for them. Nevertheless, embrace a growth mindset and continually educate yourself to adapt to the ever-changing cryptocurrency and DeFi landscape.