What is Crypto Risk Management and How to Manage Risks in Trading?
According to statistical data, the total cryptocurrency market cap has been skyrocketing 6 times higher, from $600 million in November 2020 to $2.4 billion in October 2021. It means more and more investors are jumping into this market, but most of them are newbies and 90% of them tend to lose their money. The reason is that traders may forget that crypto trading is taking risks to gain profits. So what is risk management? Let’s take a look at crypto risk management skills with Tokenize Xchange!
What is risk management?
Risk management is the ability to predict market trends, make strategies, and control possible losses. It should be one of the most important topics that a newbie must learn before trading crypto. So why is it so important?
The main reason we are trading crypto is to make money, but besides winning, there are risks in losing. The first thing that needs to be done is to consider the risks that are involved. Educating oneself on what could happen and what the best strategy is for these possible outcomes will help set up a reasonable crypto risk management plan.
>>>Read more: 7 crypto trading mistakes
Unfortunately, people don’t usually notice that. When you trade without risk management, it’s nothing but gambling. To do your own research is the very first thing to do to start trading crypto so that you can mitigate as many risks as possible.
A very specific example, you are a new trader and have faith in some big names in the market like Bitcoin. Then you decided to invest 1000 USD in BTC with the hope to gain some in bullish market. But an unexpected event or crypto FUD news like “China banned BTC mining in the whole country” happened, BTC price dropped immediately 30%.
>>>Read more: Top 5 crypto investment rules
Newbies tended to be fearful and sell all the assets to preserve their funds. That means you lost 300 USD in this situation. Generally, if you don’t do well in risk management, your money will be drained!
If you make mistakes, you have to learn from them. Learning from your own mistakes can be extremely valuable, but the school fee is pretty high by the way. So I will point out the various common situations for beginners to avoid at first.
- Over-confident: Confidence is good, but overconfidence is harmful to your pocket, especially in trading crypto. Many investors may put 50% of their fund, or even higher, into one project, in which they strongly believe that it will be profitable. But nobody can say a word in this market. So don’t take risks with that huge amount of money.
- Go big or go home: Beginner investing mentality is to gain a quick and huge profit. They tend to use all of their deposits in one stoke. But everything is two-sided. You can win big, otherwise, you would go home.
- Let emotion take control: haste, fear, or greed is not good for not only trading crypto but also any other work in normal life. Let them in control, you will dry out your pocket sooner or later.
Tips for crypto risk management?
There are many ways to manage the risk of trading. Some people choose a more conservative route with a higher return rate or a more aggressive route for higher profit but with a higher chance of losing money. Based on those purposes, there are several rules for you to obey, which will result in reducing your risks; and directly affect the efficiency of your investment.
1. Never put all eggs in one basket
If you invested 100% of deposited money in ETC, for example, and suddenly it dropped 30%, you would lose 30% of your fund. But if you had ten cryptos in your portfolio and ETC was only one of them, you just lost 30% of 10% of your fund, equal to 3% in total. Therefore, never underestimate investment diversification!
2. Determine your profit/loss ratio
No one can ensure 100% winning in this market, even a professional trader with many years of experience. Thus you have to set up a ratio of winning/losing and keep this ratio as high as possible.
- 1:1 or lower: Do not trade
- 1:2: Pretty good
- 1:3 or higher: Ideal
- Finally, control your emotion, remember to stick to the strategy
Before investing in cryptocurrencies, investors should read all the information available, do their research and consult with experts.
Crypto traders should also carefully look at what they are investing in. It is not just about buying coins or tokens but also about understanding the ecosystem surrounding them. Hence, traders need to learn about the company behind the currency and how it operates in order to make an informed decision.
New investors should also be aware of their own risk tolerance when looking at crypto trading. They need to understand what they are willing to take on because this will ultimately dictate how much risk they can afford when trading cryptocurrencies. Follow Tokenize Blog for more articles about investment.
Cryptocurrencies are subjected to high market risk and volatility despite high growth potential. Users are strongly advised to do their research and invest at their own risk.