This Crypto Mistake Cost Me Hundreds of Dollars

Don't make the same mistake I did.

About six months ago, the crypto frenzy was at its peak. It may have felt like investors could do no wrong, but I did something I quickly came to regret. I got carried away and staked $1,000 on a decentralized finance (DeFi) platform that promised three-figure APYs. Here's how it cost me hundreds of dollars and how you can avoid making the same mistake.

My $600 crypto mistake

There are many decentralized finance platforms out there that promise amazing rewards. Sometimes these are from yield farms or liquidity pools on decentralized exchanges (DEXs). DEXs need liquidity to ensure there's crypto available for people to trade. As a result, they reward investors for putting their crypto into pools -- providing liquidity. This can pay super high returns, but also carries a number of risks.

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Another way DEXs pay high yields is through their utility tokens. DEXs don't want people to dump their tokens, so they come up with clever ways to get people to commit assets to the exchange. For example, one platform multiplies any liquidity pool rewards for investors who won't touch those tokens for a whole year. Some DEXs reward investors who buy and hold their tokens by paying them a percentage of total trading fees or offering other benefits.

Here's how I made my crypto mistake. The decentralized exchange in question offered an APY of around 400% to investors if they tied up its native tokens for five years. If you're thinking an APY of 400% sounds too good to be true, you'd be right. This is because you need to stake the DEX's utility token, which is also what you'll earn in rewards. The platform is essentially printing money faster than central banks during the pandemic. As a result, the tokens devalued much faster than I earned them.

My $1,000 is now worth 90% less than it was when I bought it. It's worth $55.21 to be precise. And the 400% APY has already fallen to 120%. There's a chance the price will rise slightly if crypto prices recover, but the crypto crash is only part of the problem. The real issue is that the DEX is devaluing its own token by overpromising on its rewards.

In fairness, I have earned some yield in the past six months. And once I saw how quickly the token's value was falling, I converted my gains into USDC. In total, I earned about $200 in rewards. I might manage to make back some of my losses if the APY stays relatively high for even part of the remaining three and a half years. But I don't think I'm going to make more than $150 -- and that's optimistic.

Let's say I can make $150 more in the remaining time my tokens will be stuck on the platform. Perhaps my staked $55.21 (formerly $1,000) won't devalue any further -- but again, that's optimistic. If I count the $200 worth of rewards I converted into USDC, I will have lost around $600.

Lessons learned

Do your own research. I followed the advice of a crypto YouTuber who'd provided good tips in the past. I didn't do enough of my own research, and I didn't pay enough attention to the token's supply and distribution. I saw dollar signs and rushed into a bad decision. I thought that even if I could earn a 400% APY for a very short period of time, I'd quickly make back my original investment and it wouldn't matter if the coin didn't perform well.

Crypto isn't magic. There are times when cryptos can generate high returns, but don't assume the impossible becomes possible just because it's crypto. Always try to understand where any rewards are coming from. For example, if a platform has a certain amount of cash it can use to incentivize new deposits, it will often be transparent about how much and how long the incentives last. If you don't understand how a platform plans to pay what it promises, don't invest.

High APYs probably won't last. It isn't sustainable to pay an APY of 20% or 100% or 400% for any period of time. That money has to come from somewhere, and platforms aren't just going to give people free money. It's best to assume that the APY will fall in the coming days or weeks.

Some cryptocurrencies will fail. Cryptocurrency is a volatile asset, and prices can fall dramatically in a matter of weeks. If you believe the project has long-term value, you can afford to wait out these drops. But when small altcoins lose 90% of their value, there's a chance they'll never recover. Unfortunately, 400% of nothing is still nothing.

Silver lining

The only silver lining in this story is that I didn't invest money I needed in the short term. I have an emergency fund and I'm on track with my retirement savings. The loss is extremely annoying and there are many better things I could have done with that cash. But at least it doesn't throw my finances significantly off track. When times are good, it's easy to believe that prices will only go up. But crypto investing is not a get-rich-quick scheme, and many of these projects won't be able to sustain themselves long term.