5 Best Risk Management Strategies For Trading Crypto

The profit margin from cryptocurrencies can be quite captivating; however, if you are just splurging your money on various cryptocurrencies without enough research and caution, you may end up losing your hard-earned money. That is where the risk management strategies come into play.

In this article, we will discuss some of the best risk-management strategies that would help you in trading crypto, while minimizing losses to the maximum extent possible. These strategies are time-tested and can be implemented even if you are a beginner or an experienced trader. 

Best Risk Management Strategies in Crypto Trading

1. Diversification 

Portfolio diversification is the most recommended risk mitigation strategy when it comes to trading cryptocurrencies. Instead of investing all your money in just a single asset, you can try expanding your investment to a variety of cryptocurrencies. Now, let’s see how diversified investment can actually help you out in reducing the risk ratio involved. 

Every asset in the crypto market has different growth rates, which can fluctuate between high and low points over a period ranging from 24 hours to years. Moreover, the bullish and bearish trends exhibited by each cryptocurrency would also be different. Hence, if you face a loss due to one crypto exhibiting a bearish trend, there will be another token that may showcase a bullish trend, thereby balancing out your profit or loss ratio.

U.S. Treasury Report on Crypto-Assets: This report discusses the implications of digital asset markets, highlighting the importance of understanding market dynamics and risks, which supports the strategy of diversification.

This strategy also has some other benefits apart from simply minimizing the risk percentage involved in cryptocurrency trading. When you are distributing your total investment capital in varied assets, you will be able to observe and compare the market trends and performances of those coins over a long period of time. So, you are actually learning and exploring the trends, which will help you make an informed investment decision. 

2. Decide your maximum tolerable loss all by yourself

This is another risk management strategy experimented with and practiced by a lot of traders over time. In this strategy, you will decide the maximum tolerable loss for a particular cryptocurrency that you invest in by setting up an automatic sell order to not suffer losses greater than what you can handle. When the asset exhibits a bearish trend and falls to your lower threshold, it will be sold automatically. Thus, you will never have to face a loss that you never expected for yourself. 

FDIC Report on Crypto-Asset Risks: The Federal Deposit Insurance Corporation outlines strategies related to crypto-asset risks, emphasizing the need for risk management frameworks, which aligns with setting personal loss thresholds.

A majority of the traders quit their trading and staking journey altogether just because they had to face unexpected losses on certain assets. This issue can be fixed easily if you try your hand at this strategy and decide the greatest extent of loss that you will be able to handle for yourself. In this way, you will be able to set yourself up for success in crypto trading, while assuring the safety of your initial investment.

3. Portions matter 

Now, proportionate distribution of your trading capital has also got a lot to do with your profit and loss in the crypto market. We have already mentioned the diversification of your investment capital as the first strategy in this article. This is another strategy that is closely related to it. Here, traders decide how much capital to allocate to individual assets. This strategy demands good research from your end.

OCC Guidance on Crypto-Asset Safekeeping: The Office of the Comptroller of the Currency provides insights into risk management principles for crypto-asset safekeeping, indirectly supporting the concept of proportional investment strategies.

You must decide how much to invest in each of them according to the growth pattern exhibited by them over a period of time. If you find a cryptocurrency with a steadier growth chart, you’d better invest a greater proportion of your investment capital and then follow the same pattern for the remaining amount. It is also important that you are investing in proportions with slight differences in margins between them. Never try to make it 9:1. It is always recommended that you invest in a ratio that is similar to 4:3:2:1. Many crypto investors have enjoyed greater safety for their trading capital and also reaped major profits out of it

4. Research is the key 

When it comes to cryptocurrencies and trading, research is the key that would help you ace the race. There would be a lot of fellow traders who just invest for the sake of reaping profits. You can easily gain an edge over them by doing the proper background research every time you make a move in the market. Eventually, you will have enough market knowledge to predict trends across the market and invest accordingly. 

Learning the art of speculative trading will benefit you in a number of ways that you would have never imagined. Apart from that, there are a lot of scammers and fraudulent entities working around the clock to trick investors. If you are quite updated about what is actually happening in the market and with the asset classes that you have invested in, you are less likely to fall into such traps.

5. Be consistent and patient 

If you are just looking for miracles that can turn your 2-3 pennies into millions and billions overnight, Cryptocurrency trading is definitely not going to be your cup of tea. Just like any other investment option out there, cryptocurrency also takes its time to be profitable; sometimes it could be instant gratification, but it could also take months to return profits. However, if you are doing the art right, you would be able to make significant profits in a relatively short period of time. But in order to get it right, you need real hands-on experience with it.

Hence, you must be really consistent with it. Be consistent with your investments, research, trading, and staking decisions. You will gain the insights you need and thus make the desired returns with ease. It is also important that you keep your peace of mind whenever you have to face hard times in the market. Understand that these are normal, and everybody who is now winning the game has actually faced them before. If you are just making decisions out of instincts you get during the times of market crashes and overconfidence triggered during the times of bullish trends, it can lead you to the worst for sure. 

Also Read: How to Make $100 A Day Trading Crypto: Tips and Strategies 

Conclusion 

To put it in short, the cryptocurrency market is not that risky or dangerous, unlike the popular beliefs out there. The only thing is to be cautious and careful every time you are about to make that crucial investment decision. Apart from that, the strategies we have discussed here will definitely save you from the unexpected losses that might happen. These are strategies that are tested and proven in the market, so we can assure you that following them will be helpful in the long run.