Most investors know that risk is part of any investment. Cryptocurrency is no exception. But that shouldn’t stop you from investing in it.
So, if you wish to trade cryptocurrency, you’ll need to know how to manage the risk to maximize your returns. Some examples of the risks involved with trading cryptocurrency are liquidity risk, market risk, legal risk, and operational risk. These risks are part of the package as far as trading cryptocurrency is concerned. You can’t ignore them, but you can develop strategies to manage your cryptocurrency in spite of them. Plus, the benefits of investing in crypto are worth considering.
To succeed in trading crypto, you need to have a basic understanding of market trading. This aspect may require you to do some research to gain sufficient knowledge. Thankfully, this information is usually accessible online.
That said, below are some ways in which you can manage risks when trading crypto:
Do Your Research
Different cryptocurrencies have unique characteristics. But what all cryptocurrencies share is the fact they’re volatile. That’s why you may need to use automation tools in the form of scalping bots to be able to spot trades with greater ease. Thus, if you’re going to invest in any currency, you need to research to establish which currency works best for you.
Normally, people tend to opt for popular currencies that have a high market capitalization because the prospects for growth are higher. Less popular coins may be riskier to invest in. This advice is especially relevant for beginners to take heed of.
Crypto isn’t as easy to invest in as you might think. It’s not just about investing and letting it multiply whilst you go on vacation. To succeed with trading, you need to be strategic and understand the dynamics of how cryptocurrency works.
Diversify Your Portfolio
Diversifying your portfolio is effective because it spreads risk thinner to your other withholdings. Every investment in your portfolio, such as real estate and stocks, has a different risk profile. Items such as cryptocurrencies are at high risk because of their volatility. But assets like real estate and precious metal stocks are fairly stable and do a great job of effectively diluting your investment portfolio.
It’s not wise to only invest in cryptocurrency because you won’t have a hedge against uncertainty and loss. Rather, protect yourself by spreading the risk by mixing up your portfolio. Additionally, if you’re keen on investing in crypto, you could buy different coins instead of only one. You could then explore the option of copy trading with crypto to make life easier for you.
For the conservative investor, cryptocurrency shouldn’t account for more than 5% of their portfolio. Aggressive investors may take on more risk. But despite your risk tolerance, it’s good to practice to still diversify your portfolio.
Learn More About The Risk/Reward Ratio
The risk-reward ratio is a useful concept in trading crypto. Assuming that you know the risks involved with crypto, you still need to know whether the return justifies the risk. Yes, with investment, you have to take on some risk to get a return.
Seasoned traders can take on riskier trades. But if you’re a novice, avoid investing in something high risk. So, ideally, you want to make sure that the risk to reward ratio is safe enough to give you profitable returns.
Have An Entry And Exit Strategy Ready
Now, to manage your trading accounts effectively, it’s vital to have a game plan or strategy. Timing is important. That’s why you need to establish parameters for when to bank your gains or stop your losses. You may not always get the timing right. But at least attempt to craft a strategy that will maximize your returns.
You certainly don’t want to be in a position where you experience an immense loss simply because you didn’t have stop-loss parameters in place.
Beware Of Trading Hype
Cryptocurrency is a trending topic in most parts of the world because of the benefits that entail using it. So, because it’s so lauded, some people may start feeling that they’re missing out and get pressured into investing in crypto. The hype can get so loud that others want to jump on the bandwagon for fear of missing out on the next ‘big thing.’ This usually happens when the price is booming.
But what some people don’t know is that what goes up will come down, eventually. There will come a time when the price falls, given the volatile nature of these cryptocurrencies. Within hours, the value of your crypto may plummet. Like most investment assets, market forces of demand and supply cause crypto prices to oscillate between highs and lows unpredictably. If you’re impatient, you could end up selling your coins at a loss.
So, to avoid being a victim of hype. Be patient. If you have a functional strategy in place, you’re unlikely to fall for the hype trap.
If you want to succeed at managing risks, you need to have an effective strategy. You need to know when to bank your gains and cut your losses. Henceforth, timing is an important ingredient in the success equation. Since cryptocurrencies are volatile, it’d be best to diversify your portfolio as well to avoid making irretrievable financial losses.