Risk Management Techniques for Volatile Crypto Markets

The crypto market is highly volatile, so traders and investors use effective risk management techniques to safeguard investments. These strategies involve using stop-limit orders, leverage management, and diversifying portfolios to avoid losses. 

This article discusses volatility and factors contributing to fluctuations in the crypto market. Also, you'll learn about cryptocurrency risk management strategies and the tools to succeed.

Understanding Volatility in Crypto Markets

The crypto market is unstable, and digital asset prices often swing unpredictably. Therefore, investors must learn the ropes before making financial or investment decisions. The term "volatility" refers to how crypto prices like Bitcoin (BTC) or Ethereum (ETH) increase or decrease over time.

The leading crypto market volatilities are historical, implied, and realized. Let's get into the details:

Historical Volatility:

This volatility type is the deviation of cryptocurrency prices observed over a 30, 60, or 90-day period. It helps crypto investors and traders predict the price movement of an asset in the future.

Implied Volatility:

Implied volatility is the metric that measures the expected price fluctuations of a digital asset over a period. It's determined by options contract prices, influenced by traders' expectations and marketplace sentiments about potential price movements.

Realized Volatility:

This crypto market volatility captures the fluctuations of digital asset prices over a specific period. Realized volatility uses the logarithmic returns standard deviation, which is essential for experts backtesting trading methods and analyzing historical forecasts.

Factors Contributing to Volatility in Crypto Markets

Mass media, market liquidity, regulation changes, and whale influence are factors contributing to the volatility of the crypto market.

  1. Public Positioning and the Mass Media

The price of a digital asset often reacts to positive or negative economic news. The crypto price could surge if the news from the media is positive. Also, an asset could lose value when the public feedback is negative.

2.            Regulatory Changes

Governments changing the regulation guiding crypto assets usage across many countries could also impact the prices and market value.

3.            Market Liquidity

In a virtual market with high liquidity, traders often buy and sell crypto assets in large volumes without influencing the price. However, small trades or even a single transaction could significantly impact the price in a low-liquid marketplace, leading to a considerable shift. 

4.            Whales Influence

Whales are large crypto holders and their transactions can contribute to the crypto market volatility. A single transaction from these individuals could alter or preserve a crypto asset price, making them very important. 

5.            Technological Innovations

The mass adoption of blockchain tools and technology advancements often causes market volatility. Crypto assets widely used across different sectors can increase in value over time.

6.            Adoption and Integration

A digital currency price may rise if the asset attracts more users or buyers across different sectors. An increase in demand could increase the value of the coin.

7.            Economic Indicators

Global influences such as geopolitical issues or inflation rates also contribute to crypto market volatility. So whether crypto asset prices remain balanced, increase, or decrease depends on economic situations. 

8.            Speculation and Investor Behavior

Another factor contributing to the crypto market volatility is increased speculative trading with anticipation of the price going up. It is common among traders seeking quick profits.

9.            Technical Analysis

A digital asset chart, graph, and trend analysis in the crypto marketplace may result in wild price fluctuations. This information aids traders' decisions to purchase or offload assets depending on the direction of the analysis.

What are Cryptocurrency Risk Management Strategies

Portfolio diversification, putting stop-loss orders, and hedging are some of the time-proven tactics that help minimize the exposure to market risks in crypto trading.

  • Diversification of the Investment Portfolio

Before making investment decisions, crypto holders should learn the benefits of diversification. It simply means invest wisely and not putting all your eggs in one basket. For example, digital assets like UST and LUNA reserves couldn't keep their value pegged to the US dollar and dropped significantly in May 2022. LUNA dropped to a few cents from almost $80, and UST's price went down to 35 cents and 80 cents.

Investors can avoid this risk with portfolio diversification. Buy other valuable tokens like Bitcoin (BTC), Ethereum (ETH), Monero (XMR), and stablecoins like USDT. Bitcoin is known as a store of value, while Ethereum's use cases span different decentralized applications and sectors.

  • Setting Stop-Loss Orders

By setting stop-loss orders, crypto investors can sell the stock at a predetermined price. It helps you avoid emotional decisions, especially about opening and closing the trade, while protecting your funds.  You want to monitor the moving averages and support resistance, which are technical considerations while using the stop-loss technique.

Set the stop-loss order between 1% and 10%. Although it may not generate huge profits or significant losses, it's a safe risk management technique for volatile crypto markets.

  • Utilizing Hedging Techniques

Hedging refers to using opposite trades to avoid losses when the market position is negative. With this technique, investors eliminate uncertainty but may not earn significant market profits. Yield farming, options, futures, and dollar-cost averaging (DCA) are hedging methods for digital assets. 

Unlike investing all your money in crypto at once, DCA refers to where users continuously invest a small amount in a digital asset over a period. For example, instead of buying Bitcoin worth $1,000 at once, consider depositing $200 into the account over five weeks.

  • Position Sizing And Risk Allocation

When you determine how much crypto to trade at once based on your available capital and tolerance, it's known as position sizing. Also, controlling the amount for each trade keeps the trading environment stable by minimizing the risk of earning very high or lower profits.

Determine the amount you're willing to risk for each trade as your total account balance percentage.  For example, your account should hold $10,000 if you invest 1% of your balance in a trade. It makes your maximum risk per trade $100. Choose your position sizing based on the crypto asset liquidity and volatility. 

  • Technical Analysis

With technical analysis, investors look at the crypto assets' past price movements to identify patterns like chart formations, resistance levels, reversals, and trends. It reduces the need for subjective decisions and helps traders predict accurate price movements. 

Tools and Resources for Crypto Risk Management

Crypto risk management helps protect traders' portfolios and minimize losses without cutting out profit opportunities. Below are five risk management tools for every trader:


This platform provides risk management solutions for crypto traders and businesses. It detects illegal blockchain activities, money laundering, and fraud.


This platform allows traders to track profit and losses on trades and coin holdings. You'll receive detailed reports of the risk analysis and calculate taxes on CoinTracking.


CryptoMood uses sentiment reports and natural language processing to track market trends and news feeds, including social media. It provides customizable dashboards with real-time alerts.


With this platform, traders gain access to compliance reporting and monitor real-time risks. It uses AI and machine learning for accurate transaction information.


Use Crytolume to access crypto trading data analysis and real-time alerts. Also, it allows users to monitor trading pairs and multiple exchanges.

Key Takeaways: Effective Strategies for Managing Risk in Crypto Trading

Sizing positions, setting stop-loss orders, and diversifying portfolios are common risk management strategies for successful crypto traders. Also, holders should use technical analysis wisely, access risk rewards, and avoid making emotional decisions.

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