In this guide we will learn you how to handle crypto risk management.
Why do you need to handle crypto risk management?
There is no successful, or profitable, trader that can´t handle risk management.
So, to be profitable, you must handle crypto risk management.
In this article we will only handle risks you have control over. These risks exists between you and your portfolio.
There are many other risks associated with the trading platform security, deposit methods frauds and crypto scams.
Identify what are the Crypto Trading Risks
First, before we can manage the risks, we must identify what the crypto trading risks are.
The worst thing that can happen is that you lose your complete trading portfolio.
If that is the worst thing, what could cause that you loose your complete trading portfolio?
Here are three examples
- You trade with a high leverage
- You are over-weighted in a single asset
- You put all your capital into the market at the a bad time
Lets brake them down, one-by-one to help you understand them and how to avoid them.
Crypto Trading Risk Management - Leverage
The best thing is probably to avoid crypto trading leverage for you to minimize you crypto trading risk. By doing that, you have done a great job for crypto trading risk management.
Still, there are many traders interested in crypto trading leverage.
Because they can POTENTIALLY give great returns. BUT, they will also give you great losses.
If you are about to trade with leverage, start with a low leverage like 2x to get a feeling of leverage trading.
If you go with 20x leverage and the asset decrease 5% you entire position wiped. 5% movement is nothing in crypto trading and occurs on a daily basis.
Tip number 1: Stay away from leverage until you are very comfortable with crypto trading.
Crypto Trading Risk Management - Diversification
Here, we will describe how you can diversify your portfolio to minimize your crypto trading risks.
What does diversification means?
Did you ever heard that you never should put all your eggs in ONE basket? (Wel,l, if you didnt, it does mena that if you drop that basket you will probably end up with all eggs crashed)
This is diversification.
If you put your eggs in two baskets, rather than one, you will end up loosing half of your eggs if you drop the basket.
The same goes for any investment and trading, including crypto trading.
Dont invest your complete crypto trading portfolio into one cryptocurrency. Instead, study the top 1-20 cryptocurrencies and choose 3-5 you want to invest in. Follow these and commit time in learning more about them.
By that said, too much diversification is not good either.
Because you cant handle too many trading positions. Even if you in theory you could, you will loose you edge against the market since you cant stay focused on what is important.
Tip number 2: Choose 3-5 cryptocurrencies that you trade, watch, analyze, read about and commit extra time to. Preferably, they should all be in top 20 by marketcap.
Crypto Trading Risk Managment - Timing
How is timing connected to crypto trading risk management?
Well, go to a cryptocurrency chart, you can choose any cryptocurrency chart, and set it to 5 years. We did an example for you below where we extracted the Bitcoin chart.
During 2017 there were a great hype regarding Bitcoin and cryptocurrencies. Everyone talked about Bitcoin and how much money you could earn on Bitcoin. Lets says you decided to create a crypto portfolio and you entered the market in December 2017.
Just to make this example simple we pretend that you bought Bitcoin for the complete crypto portfolio in late December, for instance, the 10th.
As you can see in the chart from Coinmarketcap below, the Bitcoin price was 15.384 USD.
This investment wouldn’t have recovered yet, in September 2020.
What should you have done differently?
Of course, we cant back tracking. We cant just say that you should have bought in July 2017. That is not the solution to this problem.
So, we still say that you bought Bitcoin the 10th of December in 2017 BUT this time you only bought for 25% of your complete crypto portfolio. You saved 75% in fiat.
After 1 month, you bought for another 25% of you fiat holdings.
The 10th of January 2018 the Bitcoin price was $14.000.
The 10th of February 2018 you bought Bitcoin for 25% again at the price $8.600
The 10th of March 2018 you bought Bitcoin for the last 25% at the price $9.150
This will give you an average price of $11.783 which is not great but remember that you invested during the greatest bubble in Bitcoin history.
Tip number 3: Don´t invest a complete crypto trading portfolio at once.
Summary - Crypto Trading Risk Management
In this crypto trading risk management article we identified three major risks in crypto trading.
We also did give you three tips on how to manage those crypto trading risks.
Create a strategy and stay to that strategy.