Comprehensive Guide to Understand Risk Management in Crypto Trading

Trading cryptocurrency can be risky for new traders, so it is necessary to understand viable risk management strategies.  Traders can shield themselves by deploying risk management and gradually become better investors.

Cryptocurrencies are mostly considered unpredictable, and trading them can, at times, be complicated. The crypto market also experiences price swings, and similar to other investments, the possibility of an investment’s value sinking is high.

Risk management is definitely one of the most critical elements of investing in crypto. This guide explains how to manage crypto risk.

Invest Amount You Can Afford to Lose

Similar to other investments, a person must never invest more than they can afford to lose. This law applies to all markets and cryptocurrencies that can experience significant losses quickly. 

Undeniably, cryptocurrencies have converted numerous early crypto investors into tycoons. However, some novice investors have been left in financial danger.

The assets can rapidly lose value due to the constantly changing government guidelines. Crypto trading platforms can be hacked or experience shutdowns.

In 2021, a number of individuals in Singapore filed police reports against Torgue, a crypto trading platform. This happened after a rogue worker allegedly carried out unauthorized trading activities, resulting in considerable losses, and clients were prevented from utilizing the platform.

How to Transfer Crypto Assets into Cold Storage

Storing assets on a centralized exchange is linked to risks such as site crashes, insolvency, and hacks. In November 2022, FTX stopped withdrawals and filed for insolvency, bringing down the crypto sector as it plummeted.

Moving crypto assets to a cold storage gadget can avert some risks linked to trusting a centralized exchange to protect funds. A cryptocurrency exchange holds private keys and thus manages a person’s assets.

Cold storage offers full custody over one’s assets. Besides, cold storage gadgets are not linked to the internet, significantly reducing cybercriminals’ and hackers’ capability to access funds.

Some famous cold storage devices are hardware-founded and originate from firms such as Trezor and Ledger.

How to Hedge Crypto Portfolio

Hedging entails purchasing or selling an asset to aid in reducing the possibility of a position’s loss or an asset’s adverse price shifts.

Besides hedging permitting a person to safeguard their investment from hostile market changes, it permits the potential gains from one’s crypto investments. Hedging a crypto portfolio can happen via buying options, dollar cost averaging (DCA), futures, and yield farming. 

The DCA strategy involves incrementally purchasing and selling crypto at intervals rather than allocating capital in one big purchase or selling entire holdings at once. For instance, if one has $1000 to invest in Bitcoin, they can divide their investment into $200 every week spread across a month rather than buying Bitcoin worth $1000 in one fell swoop.

Despite the possibility of losing possible gains in case of a price increase after the first purchase, one might have saved themselves from possible losses in case of price drops.

Diversify Portfolio

Concerning crypto or other investments, people should not put all their eggs in a single basket. In May 2022, the price of terraUSD (UST) lost its peg to the US dollar leaving its value to plunge to exchange hands at 35 cents. Some days afterward, LUNA, its accompanying cryptocurrency, plummeted from $80 to a few cents.

Avoiding Excessive Leverage

One should never invest in just one cryptocurrency, irrespective of belief. Rather, a person should spread their investment across numerous digital assets.

Crypto holdings can be diversified by investing in projects founded on their technology or use case. For example, Bitcoin has been commended as a store of value and might be a reasonable means to preserve wealth.

The safest approach would entail sticking to lower leverage amounts, which offers additional room to boost one’s gains and a buffer zone to leave a bad trade.

Final Thoughts

Similar to other investments, risk is a part of the cryptocurrency trading experience and cannot be fully eradicated. Instead of assuming that everything will progress as planned, an intelligent trader exercises caution and is devoted to spot risky areas and finding a new strategy around them.