As is always the case, though, there is some flipside to that risk. When they go well, crypto trades enjoy benefits including the potential for highly profitable market swings and increasingly relevant inflation protection.
For the traders who enjoy crypto success, risk management is key. But, how exactly do you manage risk in one of the highest-risk areas of today’s trading world? Keep on reading to find out.
The High-Risk Nature of Crypto Trading
Before we begin to understand risk management within crypto trades, it’s important to consider why cryptocurrencies are considered so high-risk in the first place. Truthfully, there are various reasons for this, with recent studies providing particularly damning evidence that, in a general sense, crypto’s high risk may not justify its reward.
By far the prime reason for this high-risk tarnishing is simply the volatility we continue to see across cryptocurrencies. Few other financial areas are liable to fluctuate this much, making it difficult to accurately foresee volatility, or make wise investment choices. Along a similar vein, there are also market concerns about the long-term worth of crypto investments, which may not maintain their worth across long-standing portfolios.
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Cryptocurrency Trading: The Benefits
If the situation for crypto trading is so bleak, why are high-profile investors still spending energy here? Because, for all that crypto’s risks are undeniable, many would disagree that crypto’s risks fail to justify themselves.
While current crypto markets generally aren’t the high-value areas they were at their dizzying heights a few years ago, crypto investment still opens the doors for benefits that, as well as potentially high earnings and protection from inflation, include diversification from traditional assets, high liquidity, and generally low transfer costs.
Risk Management in a Cryptocurrency World
So, is risk management really possible in a world of cryptocurrency trades? Annoyingly, the simple answer is that it varies a great deal depending on your trade choices. However, there are some industry-standard ways to keep your crypto trades as secure as possible, and we’ll consider them here.
# 1 – Delve into Diversification
Diverse trading portfolios are always the answer to avoiding big trade losses. Luckily, cryptocurrencies in themselves prove useful in this sense, allowing you to more easily diversify from things like cash trades. Taking things further, it’s also worth diversifying your crypto portfolio itself to cover a range of cryptocurrencies and traders. It’s particularly worthwhile to consider how those cryptocurrencies correlate, including each asset’s risk-return rates. This way, you can always ensure you’re off-setting more risky crypto investments like Crypto All-Stars, with cryptocurrencies that are more likely to maintain a stable price point, such as Tether (USDT). This ensures that, even if you do lose, you’re also more likely to win elsewhere in your portfolio.
# 2 – Conduct Technical Analysis
Technical analysis (TA) is the process of studying the historical movements of a cryptocurrency to predict what it might do in the future. Popular technical indicators include moving averages, which use graphs to determine stock resistance levels, and relative strength indexes, which chart the historical strengths and weaknesses of a stock based on its past closing prices. There are also now plenty of risk management tools, including risk calculators that can conduct TA based on things like stock leverage and position size. All of which could lead to more informed, and hopefully more stable, crypto investments overall.
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# 3 – Use Stop Loss Orders
You don’t need to be a crypto genius to appreciate the value of stop-loss orders in trade risk management. By ensuring that a security automatically sells once it reaches a specified level, stop-loss orders are always useful in the trading world. And, they’re particularly useful on highly volatile stocks like cryptocurrencies.
To avoid issues like accidental early exits, simply make sure that you never place stop loss orders too close to the current market value of a crypto investment. Remember, cryptocurrencies will always fluctuate, sometimes to extreme degrees. Instead, optimize your stop losses by considering things like historic market volatility, and the strength of your portfolio more generally.
Takeaway
You can never take the risk out of crypto trading, but you can save yourself from losing big money when you put these essential crypto-based risk management must-haves in place.
This is a contributed post.