Why can crypto be a risky assetUnlike the stock market, crypto has a very different valuation. A share in stock is generally based on the worth of the entire company, profits, and performance. Crypto is more based on projected value and sentiment (there are exceptions to this with tokens such as BNB or stable/backed coins). The upside to this is there is no real set limit to how high or fast a cryptocurrency can grow if there is enough demand for it. The obvious downside is that it can fall just as fast. So does that mean that it's just too risky for someone new to join in? Well no, however, it's up to you to reduce the risks.Risk management methodsHold (aka hodl)The most simple and often the most profitable. By holding for an extended period of time you can even out the ups and downs. Sometimes we are our worst enemy when it comes to trading, panic selling when the price starts to go down, or even selling everything when there is an increase just for another larger gain a few days later. For Bitcoin, if you had bought at any stage and held for over 5 years you would be in huge profit.Unfortunately holding isn't a magic bullet that will always lead to profit. There are times when holding doesn't work, there are many coins that have just faded away. Additionally, you may have to be prepared to lock up that crypto for 5 or 10 years which could have been earning money on other assetsDCADollar-cost averaging, this one is pretty simple also. By putting in small amounts every week, month or year you can greatly reduce the volatility and additionally benefit from the dips. This can be superior to holding when there is a lot of price movement both up and down. Now is probably a good time to DCA rather than put a lump sum into crypto, hitting all-time highs can be a very risky time for the market to crash.One thing you may need to be careful of when doing the DCA strategy is not to get too sentimental on a coin that you like if it continues to fail. Spending more money on a lost project that will never recover is just throwing money away.Take profitTaking profit can be a great way to keep the gains that you have made. Many people rode the 2017 hype and kept holding everything only to see it crash down to levels that still aren't even close to the all-time highs that they had. A good way to take profit is to set a % that you will sell. So if something gains 10% sell 2%, gains 50% sell 10%, and so on. After a while, you may sell off your initial investment and the rest will be "free" money without ever having the fear of making a loss.Taking profit will mean you gain less in the long run if a coin continues to climb without having major corrections so there is a trade-off with how much profit you want to take off your initial investment.RebalanceSomething that is done in stock market investing is to have a mixed portfolio of safe assets and risky assets to balance out your risk levels. You can do the same with crypto, unfortunately most of the market will follow each other so diversifying multiple crypto tokens isn't really going to work. One thing you can use is stable coins to dilute your crypto portfolio then rebalance when there has been a large shift in the market. This works the same as taking profit however it can be beneficial in both directions. When there is a dip in the price you can use the safe assets to buy more, then when it goes up you sell more to go back into the safe proportion.CombinationAside from using a single risk management method, you can combine the above to suit your own needs.Let me know if there is anything I have missed or that could be improved on.
Submitted February 25, 2021 at 07:15PM
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