Crypto trading is a very high-risk activity. Not a few people have suffered huge losses from it. Risk management is essential to maximize profits, maintain a balanced portfolio and limit losses.
This article will cover the top 5 techniques (along with some additional tips) for managing risk in a crypto portfolio. This will help investors/traders control risk, protect investments, stay informed, and capitalize on opportunities in this exciting and fast-moving market. Check out the full story below!
1. Portfolio Diversification
“Don’t put your eggs in one basket” is an old investment advice phrase that advises investors to divide their asset holdings or what we call portfolio diversification.
But how exactly does it apply to our portfolio in crypto assets? Is it like if we have 100 bucks, we have to divide it into five coins equally, and each coin is 20 bucks? Such a method is undoubtedly suitable for minimizing risk, but we will not get good returns from it.
You must allocate 80% of your funds to cryptos with solid fundamentals, like Bitcoin or Ethereum. Then, you can spread the remaining 20% to various altcoins; this second method has been applied by many well-known investors in the stock market, such as Peter Lynch and Warren Buffet.
2. Stop Loss And Take Profit
A trader must use stop loss and profit targets when they want to enter the market. For example, if a trader buys Bitcoin at US$60,000, he can set a stop-loss at US$56,000 to limit losses. Instead, he can put a ‘take profit’ to lock in profits by selling the asset when the price reaches the target. For example, in the example above, the take-profit could be placed in the price range of US$68,000.
The size of your stop-loss and take-profit levels depends on the risk-reward ratio (R.R. ratio) you choose to apply. In this example, the R.R. ratio is 1:2, as the potential loss is $4,000, while the anticipated profit is $8,000 (1:2).
3. Using Leverage Wisely
If you trade in the future market, you can borrow funds even with small capital. This allows traders to open as many positions in the market as they want by borrowing funds from a crypto broker/exchange. This is what we call leverage. But big profits are always accompanied by significant risks.
For example, with 10x leverage, a trader can control US$100,000 with a capital of only US$10,000. However, you can lose all your capital with full margin conditions if the price falls by 10%.
That’s why leverage must be used with calculation and only use funds that are ready to be lost.
4. Create and Stick to a Trading Plan
The trading plan is a guide that includes strategies, goals and transaction rules. For example, a trading plan may set risk limits, such as never risking more than 2% of total capital in a single transaction.
With this rule, if a trader opens a position worth $1,000, then if the unrealized loss reaches $20 (2%), the trader must immediately close the position.
Developing a detailed trading plan and being disciplined in following it helps traders avoid impulsive decisions and focus on long-term goals. This plan should also include a clear risk management strategy.
5. Make Trading Notes
Trading records are vital in one’s trading journey. With this, you can record your analysis on what kind of crypto, why you opened a position in that crypto, and and why you made a profit or loss on a crypto.
These trading notes will play an essential role in the future as learning material for you so you don’t repeat old mistakes. You can use the application on your smartphone, Excel or a website like Notion to make it.
Crypto Investment Risks: What Every Investor, New and Experienced, Should Be Aware Of
Investing in crypto does promise the potential for huge profits, but behind this opportunity, there are risks that every investor needs to be aware of.
1. Very volatile price movements
Crypto asset prices are notoriously volatile. The value can increase drastically in a short time, but it can also drop quickly. This volatility can lead to significant losses in a short period, especially if investment decisions are taken without in-depth analysis.
For the record, when the market is very volatile, whether due to news or geopolitical factors, billions of dollars can be swept from the market, making many traders lose money.
2. Unclear regulations
Many countries still need to regulate activities in the crypto industry clearly, be it trading or daily transactions. Regulations related to crypto are still developing and can change at any time. These regulatory changes could directly impact the value and liquidity of crypto assets and affect investors’ ability to sell or exchange their assets.
3. Security risk
According to Investopedia, One of the obstacles to the mainstream adoption of digital currency has been hacking.
Blockchain, especially Bitcoin, is known for its security, which is super difficult to penetrate, and indeed, throughout history, there has never been a hacker who has been able to hack the blockchain itself. However, it would be different if what was hacked was another system connected to the blockchain, such as an application built on it or a crypto exchange whose security could have been better.
5. Illiquid Markets
Liquidity is something we must pay attention to; what a nightmare it would be if we could buy crypto but couldn’t sell it back. You can look at the top exchanges on CoinMarketCap and see which ones have the highest liquidity; that way, we can minimize trading in illiquid cryptocurrencies.
Final Thoughts
Managing risk in crypto trading is crucial for protecting your investments and maximizing returns in this dynamic and fast-paced market. By diversifying your portfolio, setting stop-loss and take-profit levels, using leverage wisely, adhering to a solid trading plan, and keeping detailed trading notes, you can confidently navigate the volatile world of crypto. While the profit potential is significant, understanding and mitigating the associated risks is critical to long-term success. Stay informed, remain disciplined, and always be prepared for the unexpected in the ever-evolving crypto landscape.
DISCLAIMER: The content provided on Biztech Community is intended just for informational and reference purposes and should NOT be construed as investment or trading advice. The material presented in this article does not serve as an encouragement, recommendation, offer, or endorsement to buy or sell any crypto assets. Trading in financial markets, including cryptocurrencies, carries inherent risks and may result in financial losses. All investment and trading decisions are the responsibility of the investor, who should be fully aware of the associated risks and rewards.
