Risk Management in Crypto: What to Keep in Mind
Each day, the crypto industry grows bigger and bigger, with tons of new concepts popping up every now and then. So it makes sense to take a degree of caution along with the excitement when dealing with cryptocurrencies.
According to Coinmarketcap, back in March 2020, the total capitalization of the cryptocurrency market was only $160 billion, and as of 7th October 2021, it has exceeded the $2 trillion mark.
As this market continues to grow at this frantic pace, many forget that crypto trading is not just about profits but also takes on risks. And if you don’t want your deposits to go down the drain on your very first day, you have to keep some important and common risk management rules in your mind.
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When trading in cryptocurrencies, risks are a common phenomenon where you lose invested funds. That is why risk management is considered to be a method of control and protection from suffering losses in case of an unsuccessful transaction.
It is estimated that 95% of crypto newbies lose money. Why?
Because of poor risk control. Impulsive decision-making in crypto trading is the ultimate enemy to your trading experience and profit-making.
This is the reason why risk management is such an important factor in cryptocurrency trading. Learning how to use it can help you avoid suffering losses on your positions.
Why Is Risk Management So Important?
Let’s take an example. Suppose you decided to invest in cryptocurrencies and bought Solana, a relatively strong and reliable project, for your entire deposit.
But suddenly, the price of Solana dropped by more than 50%. And this can indeed happen with such cryptocurrencies.
At the end of the day, you can lose more than half of your position just for locking onto a single deal. Obviously, this was a significantly exaggerated example, and not even newbie traders are foolish enough to make such mistakes.
Although it still tells a possible and somewhat formidable case where if you don’t plan and implement a risk management strategy in time and trade on unverified speculation, you’ll definitely lose money.
But it raises the question of that - Are all cryptocurrencies risky? What are the risks associated with cryptocurrencies?
Risks with Cryptocurrencies
Just like any investment and trading assets, cryptocurrencies also aren’t perfect and carry substantial risks with them, and some of them include:
- Unregulated - Cryptocurrencies are not backed by any governmental institutions whatsoever, and therefore are quite different from financial markets that are relatively safer to invest and trade-in due to their backing by a regulatory body.
- Highly Volatile - This infamous reason is enough to make you crumble in fear when dealing with cryptocurrencies. The volatility of the crypto market is seriously high, with hugely variating fluctuations.
Additionally, there isn’t a straightforward explanation behind such high fluctuations and volatility. This causes hesitation among investors and traders when dealing with crypto assets.
- Security Breaches and Frauds - Hackers and cyber frauds are becoming an increasing menace due to the rising popularity of cryptocurrencies. Crypto-assets themselves are powerful and strong on their own, thanks to heavy encryption.
But cryptocurrency exchange platforms and other services are still susceptible to frauds and firewalls attacks that can be avoided with the help of effective risk management.
- Irreversible Transactions - Every couple of minutes, a new transaction is made, and once one is performed and verified, it can’t be reversed.
The identities of transactional parties are kept anonymous and therefore the risk of irreversibility is very high.
Common Mistakes by Newbie Crypto Traders
Everyone makes mistakes, even beginner traders. Some of the most common mistakes include:
- A common situation is where a deal doesn’t turn out to be profitable, and the trader loses money. This follows the impulse of recouping everything as fast as possible to make up for the losses.
This, of course, is a really bad idea and most of the time results in further losses. Therefore, never act like this and always record your losses.
- Self-confidence turned overconfidence: Often, traders bid on some of the most volatile crypto assets, such as Bitcoin, with a majority of their deposit, hoping they’ll win big time. But the reality is a harsh mistress.
When it comes to crypto trading, building the right strategy and not risking large portions of your deposit is a great and thoughtful risk management initiative that’ll keep you and your funds secure.
Still a beginner in crypto trading? Jumpstart your progress by learning these five essential hacks for crypto trading beginners.
How to Mitigate Risks and Trade Safely
Before trading in crypto assets, you should always make yourself aware of some of the most useful tips and strategies that go into successful crypto trading.
- Understanding your Risk/Reward Ratio: This is one of the most crucial factors that are responsible for deciding your fate in the crypto trading world. Risk to reward ratios refer to the measurement of every unit of crypto you risk versus every unit of crypto you stand to make.
- Diversify Instead Of Going All-in: Instead of putting all your eggs in one basket, diversify your portfolio by investing in different cryptocurrencies.
Investing all your deposit into one cryptocurrency is highly unwise since if that one suddenly drops in the market, then you’ll lose all your money. Therefore diversify your risks. This way, the impact of cryptocurrency volatility can be combated.
- Plan Your Entry-Exit Strategies: The entry and exit points of any trade are the essential parts, and planning them creates a solid risk management strategy.
A great entry adds a bonus to a profitable trade, and when paired with a good exit, makes sure that you’re not just counting in gains but your losses too.
Want to know more about useful risk management strategies? Check this list of 5 essential risk management strategies for crypto derivatives traders.
Anything in crypto comes with its pros and cons, and trading is not an alien to this challenge. For instance, at one end, crypto offers absolute anonymity and privacy which is great. On the other hand, the same privacy can encourage fraud schemes and scams.
We must fully consider all the essentials when it comes to crypto trading and investing. Given the related risks and perks, you should not blindly dive in. Instead, do your research and pick the one that best suits your needs.
Learn more about risk management in crypto trading here.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. C-Trade, its affiliates, agents, directors, officers, or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same