Investing in Cryptocurrencies: Risk Management and Portfolio Diversification

News | June 01, 2022, 5:32 PM | The content is supplied by a Guest author

The crypto market is becoming more accessible, and therefore, more popular among the general public. According to Statista, the total number of crypto users is expected to reach 994.30 million by 2027, so there’s no doubt that this market will continue to expand as time passes.

If you’re planning on investing in cryptocurrencies, there are two essential topics you should be aware of: risk management and portfolio diversification.

Both of these strategies will help you lower your chances of losing money and diversify your assets to make your experience more exciting. However, implementing those strategies at first may be challenging, especially if you don’t have experience with crypto.

Here, you’ll learn everything you should know about risk management and portfolio diversification, ensuring you have a much safer and promising investing journey.

Why Is Risk Management Important?

When it comes to trading any asset (especially cryptocurrencies), considering your risks is as important as your profits. If you don’t take the necessary precautions when you invest, you will risk losing part of your money in certain transactions. In the worst-case scenario, you could even lose all your money. That’s why it’s crucial to use tools like Quantum AI to simplify your trading routine and maximize profits.

Risk management, in a nutshell, allows people to predict potential losses and prepare for them. Unsuccessful trades are inevitable, but if you make the right strategy, you may be able to recover quickly and avoid such huge losses.

Let’s take an easy example: You bought a crypto asset because it seemed stable, strong, or profitable. Since you were so confident in the project, you invested all your money in that same asset.

However, you didn’t take into account the uncertainty of the crypto market, and one day, that crypto declined heavily. Depending on the case, you could lose a considerable amount of your investment because of one transaction.

In essence, if you don’t prepare a good risk management plan, you risk losing all your money eventually.

Risk Management Tips You Should Consider

Thankfully for crypto investors, there are many easy tips to consider before they even begin making transactions. Let’s look at some of them:

Ignoring FOMO

FOMO (or “Fear of Missing Out”) is more common in the crypto industry than you think. Typically, investors make transactions based on their emotions, and that easily can become a huge problem.

In any case, you should always be guided by logic and strategy, as that will avoid reckless trades that can lead to considerable losses.

Even though trading based on instinct can lead to positive results sometimes, it won’t always be like that. There are many “rules” you can consider for your strategy, such as the 6% and 2% rule, for example.

This rule explains that if you’re going to open a position, you shouldn’t use more than 2% of your deposit, as this will allow you to protect the rest of your money. On the other hand, if you find yourself on a losing streak, you should stop trading if you’ve already lost over 6% of your entire deposit.

Another great tip is to use stop-loss orders, which automatically make a sell/buy order whenever the coin reaches a specific value.

Overall, remember to be mindful and never let yourself be guided by your emotions.

Evaluating Profitability

A common error among beginners is that they think all trades will be profitable for them. Something you should know before investing is that losing is inevitable. Winning all the time is simply impossible due to the nature of the crypto market.

Considering that, you must protect yourself by always evaluating how profitable your trade will be. This includes researching the crypto you’re interested in, understanding your risk/reward ratio, having realistic expectations, and more.

Diversifying Your Portfolio

Your portfolio is, simply put, a collection of all the cryptocurrencies you own. Instead of only owning Bitcoin, for example, you could also have Solana, Cardano, LiteCoin, Ethereum, and others.

Depending on how well you diversify your portfolio, you could greatly reduce the chances of losing all your money. If one cryptocurrency fails, you have the rest to recover.

Why Should You Diversify Your Portfolio?

There are many reasons why you should diversify your portfolio. Even though this is one of the oldest strategies in the book, there’s a reason why many people still use it.

In the case of cryptocurrencies, this strategy is even more important considering there are more than 10K of these assets listed on CMC.

Some great reasons why you should start diversifying your portfolio include:

• You will explore the crypto world and discover other excellent coins that fit your goals and needs.
• You could reduce the impact of the crypto market’s volatility.
• You may profit from long-term investments.

If you’re going to diversify your portfolio, however, keep in mind that it isn’t as easy as buying a bunch of cryptocurrencies and calling it a day. You must do proper research to ensure you’re investing in the right thing.

Bottom Line

Risk management is one of the most important parts of any investment strategy, and portfolio diversification is a popular plan you can start with.

Even though these strategies will require research and hard work on your end, rest assured you’ll get peace of mind next time you decide to make a risky investment with one of your cryptocurrencies.