Devote time to reading and understanding a digital asset before succumbing to the temptation to invest in it. Others’ research is not your research, and laziness might cost you money.
Cryptocurrencies are mysterious by nature, as the name implies. Plus, if you follow Warren Buffett’s advice to never invest in businesses, you may find it difficult to justify putting money in a currency that’s not made of gold but of maths.
The bear market investors and traders are experiencing might also impact crypto investments, making some get rid of their virtual coins. In contrast, others stick only with long-term crypto investments in Ethereum, Bitcoin, and other giants in this industry. Risk is intrinsic to many other investments, like stocks or real estate. But the volatility of today’s crypto markets and the speculative nature of digital coins deserve special consideration, especially for a newbie. Checking the Ethereum price on reputable cryptocurrency exchanges like Binance is the first step that comes to one’s mind before investing in crypto assets, consequently begging for the question, “How can I minimise the associated risks?.”
If you’re considering venturing into the crypto world, you need to be proactive about risk management and have a pragmatic approach. Regardless of the digital currency you choose to invest in, here are some adaptable risk management strategies that a seasoned investor would share with you.
Determine your risk tolerance
Remember the old saying, “Never risk more than you can afford to lose“? This is valuable advice that should apply to your crypto trading experience. The precise level of risk tolerated varies from person to person, but determining your risk tolerance and developing your crypto investment strategy accordingly should be your #1 priority.
You should apply this principle in two ways. First, ensure you know the risk-reward ratio for venturing into crypto and putting money into your chosen coin. Secondly, decide on the amount of money you’re comfortable losing because no charts, no professional advice, and no piece of content can guarantee you an ROI. Avoid exceeding that amount, and you shouldn’t be too sad if the first experience doesn’t turn out as you’ve hoped (as long as your hopes aren’t too high, which you should also avoid).
Be forewarned: crypto trading takes a lot of self-discipline. When the market is bullish, you might be tempted to invest more than you initially planned. The same might happen when you’re not controlling your FOMO, but you let it control you. Similarly, when the market is down, you might fear losing your money and consequently sell cryptocurrencies, forgetting about your long-term investment plan. Keep your emotions in check and let logic, not enthusiasm, lead all of your judgments.
Create a safe trading ecosystem
Your coin and trading ecosystem are equally important. Individual cryptocurrency coins come with risks that don’t exist in a vacuum. If you’re careful about your trading platform or type of wallet, you shouldn’t suffer a heavy blow to your investment. This means that you should use a widely used and trustworthy crypto exchange.
The same goes for your awareness of crypto-related scams and frauds – malicious agents can easily take advantage of you and your assets if you are out of the loop.
Knowing this, commit to creating a safe trading ecosystem that offers complete security, privacy, and control over your funds. Besides the wallet and app used, you should also arm yourself with up-to-date information about crypto scams and other illegal activities. You will minimise the risks of being associated with corrupt, criminal, or tainted activity, and you’ll be able to warn your peers about the tactics bad actors use.
Determine what risks come with the chosen cryptocurrency
No coin is created equally; some carry unique risks that others don’t. One cryptocurrency might fall into a legal grey area, while another may be actively banned in a certain place. Some coins are more vulnerable to security issues and breaches than others because of the nature of their protocols. In contrast, others carry significant liquidity risks because their markets run hot and cold.
It would be best to understand these differences to be prepared for the trials and tribulations your chosen coin might come with.
Besides your preferences like user-friendliness and privacy, your choice of coin should mainly reflect your risk appetite. If these characteristics are in sync, you shouldn’t have problems dealing with risks that may come your way.
Diversify your investment portfolio
And this calls for another saying; “Don’t put all your eggs in one basket.” Simply put, refrain from anchoring all your investment hopes in crypto. While crypto can sometimes be rewarding if the cards are played right, success isn’t guaranteed, as the market is still highly volatile and prices fluctuate a lot. The demand that drives prices up isn’t something one can predict easily. Therefore, a diversified investment portfolio can include more types of assets, like the following:
- Fixed-income investments
- Bonds
- Stocks
- Mutual funds
- Index funds
- Commodities
- ETFs.
Consider your crypto assets as just one investment option among several that may build a well-balanced portfolio that diversifies your risk. When the value of one asset falls, you’ll have another to balance out your portfolio and keep you out of the red.
Prepare an exit strategy
Finally, while you may want to avoid thinking about the situations that would force you to cease trading in your favourite digital coin, it’s essential to have an emergency exit strategy. You should be able to tell when it’s time to switch to another currency or stop trading altogether.
If you’ve decided on an entry amount for your entry into crypto, you should do the opposite when it’s time to close that chapter. This is referred to as an exit amount and can serve as a concrete benchmark for preventing a major loss.
Having an exit strategy, however, shouldn’t discourage you from putting effort into trading if you feel like you’re doing a good job, have a feel for the market, and like staying up-to-date and researching the latest crypto news.
Risk is part and parcel of the investing experience, and the smart and seasoned trader knows this and works around it. Make unbiased investment decisions rather than following the advice of a “seemingly” trustworthy or experienced individual.
And most importantly, invest only when you’re ready.
