Cryptocurrencies hold tremendous upside potential as an asset class. Yet over recent years we’ve seen both fortunes being made and being lost with people entering crypto markets. Unless you are a professional trader, we believe crypto investors tend to mitigate risk tremendously by sticking to sound investment principals.
When cryptocurrency investors don’t practice adequate risk management, their investments start to look and feel a lot like bets. Adding to the precariousness of employing sufficient risk management is the over-saturation of cryptocurrency exchanges available to both novice and seasoned investors alike.
Due to the lack of standardized regulations across the global scene of crypto exchanges, novice investors with little-to-no trading experience can freely climb into the ring with veteran Wall Street traders. As one might imagine, this Wild West trading scenario has led to untold losses for both inexperienced and experienced traders alike. For pro traders armed with bots, quant strategies, and years of trading floor combat, exchanges that are rife with retail traders, such as Binance, are essentially ATMs.
According to Nasdaq, roughly 90% of traders lose their initial investment within six months when trading forex markets. Considering that cryptocurrency is several orders of magnitude more volatile than forex markets, it is safe to assume that the percentage of crypto traders losing money is over 95%.
As such, the safest strategy for retail investors (meaning private investors as opposed to trading desk professionals) is to invest as opposed to trade, and to do so long term using several investment strategies for risk management.
The good news is that there are new and emerging products that incorporate investment best practices that are discussed below. Vest app is one such product. (You can go to vest.app/try10 for a special signup bonus if you invest with Vest)
Don’t Chase Hype
Patience is vital when investing in cryptocurrency. The main reason for this is that crypto, unlike other markets, moves almost entirely according to hype cycles.
Hype cycles take cryptocurrency asset prices sky high in short amounts of time (known as mooning). Perhaps an asset that’s on a moon mission is one that you’ve had your eye on for some time and were just on the brink of buying. It is of mission-critical importance that in moments like these you don’t chase the price and instead take a backseat to the action.
When assets have been seized upon by a hype cycle, you can rest assured that the higher they rise, the further they fall. In these circumstances, your patience will reward you as you will:
1. Avoid paying exorbitant prices fueled by desperate FOMO (fear of missing out)
2. Buy the asset at significantly lower prices after the hype cycle wears off
Diversify Your Portfolio
Maintaining a diversified portfolio is the key to excellent crypto risk management. If you scan different cryptocurrency Reddit forums, you’ll find hordes of users proclaiming with pride that they are *all in* on one coin in particular.
The thing is — going all in on one asset is no different than playing a game of roulette. You live and die by the hand that you’re dealt when holding a single asset.
Rather than rising or falling by the fortunes (or lack thereof) of a single crypto project, the wisest method is to diversify across several promising assets in proportions that mirror the risk profile of each asset. A properly diversified portfolio should allocate more weight towards more established currencies with larger communities behind them.
When diversifying, it’s also useful to hedge against certain assets by similarly investing in their well-heeled competitors.
Dollar Cost Average Crypto
Investing is a task to be undertaken over time. Rather than invest all of your available funds in an asset at a single given price, it is wiser to dollar cost average into an asset by buying it in intervals spaced out over a pre-determined timeframe.
The way dollar cost average works is simple and is effective for giving you exposure to the asset at an entire range of prices. Timing your investment is impossible — you will seldom buy the exact top or exact bottom of any digital asset. But, if you dollar cost average over a period of months, you’ll have a prolonged opportunity to level out your average cost for that digital asset.
Dollar cost averaging works like this:
1. Choose an asset and determine a fixed schedule wherein you will periodically buy a cryptocurrency asset no matter what its price is.
2. The longer the timeframe, the higher the odds that you will buy the asset at low prices since crypto prices move in cycles.
3. At the end of your schedule, calculate your DCA and hold the asset to the end of the profit targets you’ve determined in advance.
Bringing It All Together
You can use the aforementioned strategies in combination to create a strong cryptocurrency portfolio. Cryptocurrency markets are notoriously volatile, so make sure to stick to your strategies without paying too much attention to intraday price swings.
At the end of the day, gamblers are a reactive lot whereas investors patiently wait out the storms and make hay when the sun shines. By following a few basic principles, you’ll effectively preserve your capital and have peace of mind to boot.
You can use a product like Vest to make all this easy and setup a diversified and dollar-cost-averaged crypto portfolio within minutes.
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