5 important tips for managing crypto risk
Of CNBCTV18.com IST (published)
Mini
Cryptocurrencies are highly volatile. Therefore, you should avoid investing large chunks of money in these assets. Instead, start with smaller amounts and continue to invest part of your disposable income.
Risk management is perhaps one of the most important aspects of investing in cryptocurrencies or any other asset class. Any investment, no matter how safe it may seem, has a chance to go south, causing you significant financial damage.
However, if you are prepared for such events from the outset, you can minimize their impact on your financial well-being. With this in mind, let’s look at a few risk management measures to help you navigate the choppy waters of the cryptoverse.
Only invest as much as you can afford to lose completely
Cryptocurrencies are highly volatile. Therefore, you should avoid investing large chunks of money in these assets. Instead, start with smaller amounts and continue to invest part of your disposable income. This way you don’t lose a lot of time if the crypto market crashes or a project fails.
Avoid making emotional decisions
FOMO and R&D can drive investors to make poor investment decisions. Therefore, instead of giving in to these feelings, it is better to base your investments on deep research. Review the project’s whitepaper and understand the problems it seeks to solve.
Find out about the fundamentals of the project, including the founders, tokenomics, the technology behind the token, the roadmap of the project, etc. This will give you a good idea whether the project is worth investing in or not. You can also look at technical indicators such as traded volume, chart patterns, candlesticks, moving averages, etc., to gauge future price movements of the asset.
Secure your crypto ecosystem
It’s not just market corrections you need to fear when it comes to cryptocurrencies. Losses can also come in the form of fraudsters and hackers. Therefore, it makes sense to choose a secure crypto exchange. Look for someone with a good track record and insurance coverage for custodial services.
But even if it offers insurance coverage, try not to leave coins on an exchange when you’re not actively trading/investing. Storing them in an offline wallet is a much safer option. Also, make sure you are well aware of the latest crypto scams; this allows you to avoid anyone targeting you.
Diversify
This tip applies to almost all asset classes; you need to spread your investment risk over many different coins and tokens. This way, if one project goes under, you still have your toes dipped in others that can help you recover your losses over time. Also, one of the many coins you have invested in could shoot for the moon and you would have missed the opportunity if you had not diversified your investments.
Have an exit strategy
It is important to have an exit strategy. It ensures that you have a systematic way of handling the situation when things go south. Some investors hold onto an asset in the hope that it will rise again. But that day may never come, and they are left with the bag.
Therefore, just as you determine the right time to invest in a cryptocurrency, you should also decide the opposite. This is called an exit amount, a number that can serve as a concrete benchmark to stop a serious loss. At this point, you may consider pulling out of an asset and redirecting those funds elsewhere.
