Risk management strategies for a safe and rewarding crypto trading experience

Risk management strategies for a safe and rewarding crypto trading experience
The Siliconreview
20 September, 2022

Risk is an integral part of investing, no matter what asset class you opt for. Every investor will suffer losses at one point or another, no matter how skilled or experienced they are. However, crypto trading tends to be riskier than other types of investments due to the high volatility of the market. Compared to traditional investment options, cryptocurrencies are a fairly new financial instrument that we’re still trying to grasp, and they’re influenced by a wide range of factors that can lead to sharp and sudden moves in price. 

Given the speculative nature of cryptocurrency investments, you can earn a lot of money and build wealth with cryptos, but you can just as easily lose all your funds in one single swing if you don’t know how to approach the process. Unfortunately, a lot of people become so mesmerized by the potential of high returns that they get carried away and forget all about the risks they expose themselves to. Many of them are under the impression they’re following the path to financial freedom, when in fact they are headed straight for financial failure. 

So, if you want to become a successful crypto investor and enjoy a rewarding trading experience, these strategies can help you mitigate risks and protect yourself against losses. 

Have a long-term strategy 

Looking back at the history of cryptocurrencies, we can see that while cryptos are highly volatile in the short term and experience frequent price swings, the market has continued to grow and expand over time. There’s a constant cycle in the crypto market, where periods of decline are followed by periods of recovery and growth. So, if you think of crypto trading as a short-term investment or worse, a get-rich-quick scheme, and hope to earn large amounts of money by catching an upward trend, the risk of losing your investment is a lot higher. 

But if you’re in for the long run and plan to invest over a longer period of time, you’ll be less influenced by short-term price fluctuations. So, instead of timing the market and planning your moves based on sudden price movements, it’s best to hold on to your assets as their value will increase in time, leading to higher gains. 

Don’t invest more than you can afford to lose 

As a first-time investor determining the amount you should invest in cryptocurrencies is one of the aspects you need to clarify. The ideal amount obviously differs from person to person, so it can be difficult to figure out how much is too much. When in doubt, you should go back to one of the golden rules of investment that says you should never invest more than you can afford to lose. 

Determining the risk threshold will set a clear line for your investments and keep your trading on track. However, it can be very easy to get carried away and stray away from your initial plan, so you have to be disciplined about it and stick to the rules you’ve set for yourself. 

Research the risks associated with specific assets 

There are many digital currencies you can invest in – each of them with its own pros and cons, and obviously with different levels of risk. Experts advise sticking to the most popular cryptos, especially if you’re a beginner, as they have a track record of holding their value over time, so they are safer and less unpredictable than smaller coins that have just emerged on the market.   

This doesn’t mean that already established cryptos like Bitcoin or Ethereum are free from risk. So, if you decide to invest in Ethereum, you should do your homework and learn about its history, find out what makes it different from other cryptos on the market, check the ETH price chart, and read every piece of information you can get your hands on to gain a better understanding of the risk associated with the coin. 

Diversify your portfolio 

While doing proper research can help you assess the risk level of specific assets and make better-informed decisions, it’s still impossible to accurately predict what will happen with a coin in the future. Crypto prices can crash unexpectedly, and when that happens, you better not have all your money invested in that one asset that has taken the plunge because that can put an end to your investing career. 

That’s why smart investors never put all their money into a single type of asset, and you shouldn’t either. When building your portfolio, follow expert recommendations and keep your crypto investment at less than 5% of the total. The rest of your portfolio should be split between different asset categories, so if things don’t go as planned in the crypto department, you’ll have other investments to balance out the loss and keep you afloat. 

Don’t give in to the hype 

The stream of news and discussions about crypto is never-ending, so it’s easy to get influenced by all the buzz surrounding the topic. Since crypto trading is already volatile enough as it is, the last thing you need is to throw fear of loss or fear of missing out in the mix. 

Instead of giving in to the hype and following the crowd, you should try to block all the noise that can make you lose your focus and throw you off track. Investment decisions should be guided by reason, not intense temporary emotions, so use your better judgment before you take action. 

Have an exit strategy 

Although you never go into crypto trading with the thought of failing, it is something that you should consider. It’s a good thing to have an exit plan in place in case things don’t turn out the way you hoped, and holding on to your asset doesn’t make sense anymore. This strategy will help you figure out when it’s time to sell your coins and shift your attention towards other assets, so you can minimize losses. 

Crypto trading is and will probably always be highly volatile and unpredictable. So it’s the way you build your strategy and get ready to face the risks that will determine the success of your trading journey.