6 Proven Steps To Manage Risk While Trading Cryptocurrency

6 Proven Steps To Manage Risk While Trading Cryptocurrency

4aaCrypto assets have high price volatility, which makes cryptocurrency risky to trade. In addition, the crypto market is quite well-known for its price swings, and just like every other financial instrument, these make it possible for your crypto holdings to drop in value suddenly, regardless of your personal opinion.

To avoid losses while trading crypto, you need a quality risk management strategy. In this article, we will discuss six proven ways by which you can protect your cryptocurrency investment while trading the market.

1.  Invest what you can lose comfortably

As simple as this instruction is, it is very crucial to keep your mind at peace. Trading with the amount you can lose without getting agitated gives you a clear state of mind to trade in. Imagining trading with borrowed funds or money meant for another compulsory purpose, your mind would be troubled, and it can affect your trading strategy and winning psychology.

This boils down to the fact that you can earn millions or lose millions in minutes due to the high volatility of the cryptocurrency. This makes it dangerous to trade with borrowed funds. Hence, you should avoid trading with what you cannot afford to lose.

2.  Move your cryptocurrency  assets into a cold wallet

Another hint towards having a successful crypto trading experience is that you should use a Cold cryptocurrency wallet, like Trezor or Ledger, to store your crypto assets. This is because keeping your assets in a centralized custodian exchange CEXs is riskier as CEXs are prone to cyber-attacks or possible bankruptcy, just like the case of the FTX exchange in 2022. Note that either scenario can lead to permanent loss of your crypto holdings.

On the other hand, a Cold wallet is primarily an offline digital asset storage protecting your crypto holdings from cyber vices. Also, you have 100% access to your coins and absolute privacy, unlike hot wallets, which are managed by your custody service provider. Hence, keeping your coins in cold storage is ideal.

3.  Hedge your crypto investment

Hedging is an old financial market strategy involving sales and purchase of assets to minimize loss according to the price action of the coin. Although this method is very effective in protecting your investment from harsh crypto market swings, it however limits your potential to gain from a price rise of your investment.

There are several ways to hedge your investment, this includes the dollar cost average (DCA), yield farming, futures, or buying options. DCA is an effortless way to hedge your crypto portfolio, involving gradual purchases or sales of crypto assets at intervals instead of seeking your entire crypto assets in one breath.

4.  Diversify your crypto portfolio

When it comes to finance, especially cryptocurrency, which is highly volatile, it is ideal to avoid setting all your eggs in a basket. In 2022, the UST stablecoin, designed to maintain the same value as the US Dollar, suddenly lost its peg, dropping drastically to 35 cents. Imagine having all your crypto funds in UST. You would have lost about 65% of your investments. This was the case for some of the victims of the incident.

But by diversifying your crypto holding, you have a hedge of still retaining some of your assets even if such a scenario stated above happens. Hence, it is ideal to spread your crypto portfolio across different crypto assets.

5.  Maintain Low leverage

While trading futures, you have to be prudent. Using a logical leverage volume would help minimize your loss rate. Let’s say, for instance, Mr. A trades with 100% leverage while Mr. B trades with a 20% leverage level.

If the market moves a few steps against their prediction, with 100% leverage, Mr. A can easily burn out all his portfolio; meanwhile, a %20 loss is still reasonable for Mr. B to continue trading. Hence, sticking to lower trading leverages helps you stay in the crypto trading game much longer.

6.  Be Cautious

Crypto futures trading is one of the fastest ways to get rich, however, you should learn first. Learn how the market moves and what to do and what not to do. Nonetheless, instead of living that everything would go as planned, a smart crypto trader always knows risky areas and how to navigate them.

DISCLAIMER: It's crucial we tell you that the content on this page is not meant to serve as, nor should it be construed as, advice in legal, tax, investment, financial, or any other professional context. You should only invest an amount that you are prepared to lose, and it's advisable to consult with an independent financial expert if you're uncertain. To obtain more information, we recommend examining the terms of service and exploring the assistance and support resources provided by the issuing or advertising entity. Our platform is dedicated to delivering accurate and unbiased reporting, but it's important to note that market circumstances can change rapidly. Also, be informed that some, though not all, articles on our site may be sponsored or paid content.

Chad Butler
About Author

Chad Butler

Chad Butler, a renowned name in crypto journalism, excels in translating complex blockchain topics into lucid prose. His astute analyses and timely updates make him a trusted voice in the cryptocurrency landscape. Through his articles, Chad consistently offers readers an informed and insightful perspective on the evolving digital market

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