Risk management in the cryptocurrency space

Categories: Educational articles | Published by: Dimitar Dimitrov

28/07/2019

Good risk management is the secret

Having good risk management in this industry is one of the most important things. Good portfolio balance with your money diversified in different cryptocurrencies may be the difference between getting broke or become successful. Besides learning how to transfer FIAT to crypto and learn how to properly store it, you also need to have a good risk/reward ratio. Because the crypto industry is unpredictable and everything can change in a few days. You need to know when to buy and how besides diversifying your long or short term investing.

If you want to know how to improve your risk/reward ratio this is the article for you. We will provide an opinion on how you can have a successful long term portfolio. For the investors who want to try to have a short term profit, we will include a trading section. If you come from the traditional markets and want to start not only investing in different projects and Bitcoin, you may want to trade the crypto market.

Better risk management for better profits

Besides investing in the long term, you have the opportunity to learn about trading and other important knowledge. Thus helping build a deeper understanding of the markets. Therefore you can give yourself a better chance for building a better-balanced portfolio with the ultimate risk management ratio. There are different strategies and it depends also on your capital. How much are you going to invest, how much are you willing to risk, what is your level of risk tolerance, etc…

How and where to start

If you have made the final decision and are ready to make the first step towards trading and investing, start by going to a platform after doing research of the exchanges. After you have bought Bitcoin and want to diversify for better risk management you go to exchanges like Binance/KuCoin to buy the altcoins that you have chosen. Remember that for a balanced portfolio you should keep 50% in Bitcoin and from there diversify to other projects. As it is the most secure asset and the one that institutions like ICE-Bakkt/Fidelity are building services for. In the long term, it is the most secure investment. Remember everything out of the top 10 on the cryptocurrency market is to be considered a higher risk.

Portfolio with good risk/reward ratio

For example purposes, for better risk management we will structure our portfolio like this:

50% – Bitcoin
20% – ETH (Ethereum)
25% – We will allocate in different projects with high potential with 50% in projects that are considered high risk as they are basically startups that may fail.
5% – We will keep for trading on leverage trading platforms like PrimeXBT, ByBit or Bitmex (This is for more advanced investors that want to profit on the movement of the market)

Let’s say that this portfolio is suitable for the capital of 10-50k USD. The investing strategy depends on how much you are going to invest because if you want to invest a bigger amount I would recommend you to keep more in BTC – from 50% make it 75% in Bitcoin. Why? Because it is the most secure and liquid crypto on the market.

Why Trading is a good addition to your portfolio

There is a whole other side to profiting from a market like this besides just investing and holding for the long term. This part is riskier than simply investing and this is why you use a very small amount from your whole capital. Here you have a steep learning curve, but you can always start right after learning the basics. How leverage works, how to use long and short positions and to read a few indicators.

If you wonder if trading Bitcoin and other cryptocurrencies are profitable, we have an article which you can read here. Of course, it all depends on the trader and his skills. There are a lot of factors that need to be considered.

Trading the markets can give you more knowledge as you will see the need to educate even more.

How does this help me to have better risk management

Seeing and experiencing the markets from this perspective can open you to a broader understanding of the whole space. Besides just investing and holding for the long term. It is possible that you may find something in trading that will give you more ways to profit.

Of course, considering that trading is harder than many other activities, it is certain that it will make you learn how better manage your funds. Therefore you have a better knowledge of how to have good risk management while maintaining a very good risk/reward ratio. The best lesson for this comes when you need to learn how to properly manage positions after a few losses. To learn how leverage positions work you can read here.

Is there more to managing risk

One last addition to managing and having a balanced portfolio is to do research. When you want to diversify besides owning only BTC and ETH, do your research on the fundamentals. Never invest in something without doing proper due diligence as you don’t want to get involved in very bad projects. Remember the risk is always there and this is a young industry, thus you should expect failures along the way.

Bitcoin and some of the altcoins have great potential for the next few decades, getting in the right positions earlier is crucial. You can build a sizeable wealth if you have good risk management and a balanced portfolio.