managing risk

The Importance of Managing Risk for Cryptocurrencies

If you are buying cryptocurrencies as an investment, then you are very likely aware that there are risks involved and you must adapt. One of the ways to reduce downside risks (in case your investment proves to be wrong) is by using a proper risk management model. Today we will talk about how you can apply such thing for both long-term investments and cryptocurrency trading.

Diversify, diversify!

The cryptocurrency market has the potential to keep moving higher and with it, a lot of investment opportunities can arise. Two weeks ago we’ve talked about the reasons why crypto valuations are moving up in 2020 and based on that material, there are plenty of reasons to believe that a new major bull run can occur in the next 2-3 years.

Long-term investing is thus one of the main ways to benefit from the cryptocurrencies’ potential, but what most retail individuals fail to understand is that a balanced approach is required. Investing in one or two cryptocurrencies might not be the best idea, given the high rate of uncertainty.

As a result, you will need to diversify. Also, keep in mind that diversification is a very complex topic. It would be important to invest in cryptocurrencies working in different fields. At the same time, if you can find uncorrelated instruments, it would be even better, since your portfolio won’t suffer large swings.

Professional cryptocurrency trading

When it comes to cryptocurrency trading, we’re talking about those who to profit from short-term price moves. In this case, a diversified portfolio may not be needed, but a list of cryptocurrencies that are active and have a directional bias. Traders need volatility and the proper tools to leverage it, or else, they will “trade for water”.

Dealing with risk in the case of trading has to be done differently. Traders need to look at variables like risk/reward ratio, trading accuracy, and percentage of account at risk, to assess their market exposure and the probability of losing money over time.

Putting risk first, then the profit!

Learning to gauge the risk sentiment in the crypto market is one thing and managing risk like a professional is another. Same as with other assets (stocks, FX, ETFs, etc.) when dealing with crypto you will need to think about risk first and only then the profit potential. In doing so, no unexpected event will take you by surprise and on top of that, you will manage to succeed in an environment where most people fail.