How to reduce risk in crypto and stop worrying (not really)
Are you a risky person? Even if you are, I bet, it’s only until it comes to money. Nobody likes to know that there is even the slightest possibility of losing their hard-earned cash. People are so afraid of money-related risks that they joyfully invest in everything that seems to bring guaranteed profit. In 2017 everybody rushed into cryptomarket, hypnotised by unstoppably growing rates of Bitcoin. It seemed that crypto was a win-win lottery with zero risk—you invest, and then you get profit, no other options. When Bitcoin fell from 19 000 USD to 8 000 USD, people suddenly understood that cryptocurrency is not all roses.
Bitcoin is not just a risky investment, it is the riskiest investment possible. But “risky” doesn’t mean “bad”. It just means that you have to be more careful than usual and have a backup plan in case your hopes will be dashed. And, of course, there are some precautionary measures you can take to reduce risk. Let’s start with the basics.
What is risk?
Simply put, a risk is a threat of losing invested funds. There are no risk-free investments. All of them are risky but in different degrees. Even if you put your money into the bank, it may go bankrupt, and money will be gone.
Risky investments are dangerous, but they usually promise much higher returns in case of success. Usually the higher is the risk, the higher is the profit you can get. Investing in reliable, time-tested project will bring certain profit with minimal risks, but such profit is incomparable to the one you can get by investing in a small, but ambitious start-up. Yes, it’s risky, yes, you will wake up at nights asking yourself why you haven’t bought a car instead of getting involved in such “adventure”, but if the project makes it big time, you won’t regret it.
How to determine your risk appetite?
It’s impossible to achieve something without a risk, but how much risk can you stomach? Risk appetite is a level of risk that you are ready to accept in the pursuit of some objective. If you make an investment, it is a sum of money you are prepared to risk. If you take too little risk, you won’t achieve your financial goals, if you take too much—you will lose the investment. Your risk appetite mustn’t equal everything you have. Don’t mortgage your house and invest in crypto. A loss of the risk sum must not affect your life drastically. Remember that “all-or-nothing” investments tend to end up as “nothing”.
There are many newcomers in crypto who buy coins for money they can’t really afford to spend. Their main argument is: “But [insert the name of some billionaire] has bought Bitcoin for a few millions of dollars! And he is an experienced financier, he knows what he’s doing!”. The problem is people don’t see the whole picture. If a guy who has a billion of dollars, invested ten million in Bitcoin, it doesn’t show his loyalty to digital coins. Spending this sum for a billionaire is like buying a cup of coffee for average office worker. He just tests the water, checking the opportunity to enlarge his capital. If he multiplies his investment—great, if he loses it all—doesn’t matter, it’s not a big damage for him. So never, never be misguided by anybody else who invest enormous sums in crypto. It doesn’t mean anything. Gather your wits!
Determine a sum you can afford to invest right now and, what is more important, you are ready to lose if anything does wrong. If the sum is too small to give any tangible profit, then consider saving some percent of your salary every month until it will be enough. Don’t take money you kept in bank deposit to pay for children’s college, don’t sell your car—don’t sacrifice anything to buy crypto. Just save money specifically for this investment. Excuses like “But it’s the best time to buy, I can’t wait!” don’t work. People used to say this when Bitcoin price was skyrocketing, they kept saying this when Bitcoin was plummeting, but the truth is nobody knows when is the best time to buy crypto and what is the future of crypto market.
How to reduce risks?
Crypto investment is something completely new. Wild fluctuations make Bitcoin a great temptation for investors, as well as a source of danger. It’s difficult to determine rules and patterns of the stock market, to say nothing of the crypto. Traditional strategies don’t apply here. But there are few simple rules following which you will minimize crypto investment risks.
Don’t fall under the charms of promises that look too good to be true. Don’t ever invest while emotional. Without proper research you may end up investing in coin a that exceeds your risk appetite. Common sense is the main tool to avoid investing in dubious ventures.
Don’t rush to invest just because everybody is doing so. Crowd can be wrong. Rely on yourself and always do a research before investing. Learn to understand the crypto space to minimize the risks. Don’t repeat the mistakes of others—never forget about risk. There is nothing terrible in investing in a risky venture, just include risk in your calculations.
Diversify your portfolio
Investing in several different coins is a great way to minimize risks. But diversification is not a one-time task. You have to check your portfolio, buy promising coins, sell the ones that haven’t met your expectations. Such “audits” are essential to make sure that your portfolio has a risk level consistent with your risk appetite.
How easily can you buy or sell the currency you plan to invest in? There must be an opportunity to quickly trade it to react to the latest changes on the market. Even the most valuable coins are worthless, if you can not sell them. Which means, you need an exit from your market position. Preferably, several exits.
If the project is promising but its coin is traded only on some unreliable exchanges where the transaction process may take a few days—don’t buy it. Wait and see whether it will be added to new exchanges. The possibility of buying and selling of the cryptocurrency the moment you want it is the crucial point in minimizing risks of crypto investments.
Assess the potential to grow
Being an early investor is more profitable. If you invest in the cryptocurrency that has already passed the stage of active development, there is a risk that returns you get will be lower. Invest in projects that have perspectives. When choosing a cryptocurrency to invest in, look what is the concept behind it. Is there any real implementation of this coin? How does it differ from hundreds of other altcoins? If there is room to grow and you believe this cryptocurrency will find its niche on the market, don’t hesitate to buy it. But make sure your risk appetite complies with the risk level of this investment.
Set your principles
Choose a strategy of investment and always stick to it. This will help you to avoid spontaneous actions you may regret later. Don’t invest only in high-risk coins. Choose a model of your investment. It can be, for example: 60% low-risk, 30% medium risk, and 10% high-risk coins.
There are a lot of various risks in cryptocurrencies. There is a risk even when you buy Bitcoin—if you use a scam exchange, they can just take your money and do not transfer you the coins. There is a risk that crypto wallet can be hacked and coins stolen. There is a risk to lose the private key and don’t be able to restore access to your coins. Risks, risks, risks.
But there are another, much more pleasant “risks”. A risk that a crypto you invested in will skyrocket and you will suddenly become an owner of big capital. A risk that as a result of reasonable investing in different altcoins and trading them for a few months you get money enough to buy a car of your dream. A risk that in 10 years the fiat money will be put out of the market by cryptocurrency and those who don’t invest now will regret the missed chance.
Risk itself is neither good nor bad, it just exists. If you want to achieve your goals, you have to risk. The point is to assess your abilities correctly.
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