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5 Ways for Cryptocurrency Risk Management

5 Ways for Cryptocurrency Risk Management

  • 4 February 2022
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A cryptocurrency word can split into two parts crypto which suggests hidden and currency which implies a medium of exchange. It is a digital or virtual currency that is secured by cryptography (Blockchain technology). It aims for an alternate financial system and is not dependent on any institute or software. And also It has no limit on transactions or volume. Its idea is to either replace the paper currency or to be looked upon as an investment. It’s also popularly referred to as digital gold. Let’s talk about the most important subject in cryptocurrencies, cryptocurrency risk management.

It is made by strong cryptography over various computer networks. Cryptocurrency is a Blockchain product. Cryptocurrency is decentralized in nature, meaning it’s not governed by any central authority. It enjoys zero interference due to no regulation.

The first cryptocurrency, Bitcoin was launched in 2009 and now there are over thousand other currencies trading on this platform. Bitcoin is the most famous cryptocurrency and has always been in the news for quite a few years now. Ethereum, Dogecoin, etc. are some other known cryptocurrencies.

What is cryptocurrency trending?

Cryptocurrency lately, is one of the most popular topics trending over the internet. People who use the web have at least heard about the term ‘cryptocurrency’ or ‘bitcoin’ even if they do not know the actual meaning. Every other influencer on the internet is either talking about crypto or promoting its apps. What is this buzz all about? Well, there are not one but many reasons for it. Let’s go through them one by one!

In terms of cryptocurrency legality in India, Crypto is not regulated but also not illegal. There is a tax on cryptocurrency in India which is applied to your purchase. Many apps and websites are launched where cryptocurrencies can be traded. These apps and sites are made visible to the audience through digital and influencer marketing. Many crypto traders are teaching crypto through their courses and YouTube which again catches the attention of people on the web.

What is cryptocurrency trending?

Crypto Trading

Legalizing bitcoin and cryptocurrency is a never-ending debate. Many countries have banned it but the US is trying to regulate it. The debate continues as the countries, big business tycoons, profit & loss-makers talk against each other therefore creating more hype.

These are some of the reasons why crypto is trending. Bitcoin might or might not be the ‘next big thing’ but one thing is for sure, if you don’t consider the risk, you’ll eventually fall. You’ll see plenty of channels talking about ‘why you ought to invest in crypto’ but there are only a few who speak about the risk associated with it. So be aware and decide what’s best for you.

Mining difficulty only increases with more competition and is dynamic thus ensuring that mining will always remain profitable as long as Bitcoin remains more fungible than digital fiat.

Cryptocurrencies are generally termed speculative investments. Thus, prices of the most popular currencies have become increasingly volatile in the past few months.

Cryptocurrency Risk Management: What are the risks associated with cryptocurrency?

Highly volatile: The Volatility of the crypto market is extremely high. The price fluctuations are extremely high. Moreover, there can’t be accurate reasoning behind the fluctuations or volatility. Due to the unstable characteristic of cryptocurrency, there’s reluctance among people to invest in it.

Irreversible transactions: Transactions occur in a couple of minutes. Once the transaction is performed, it cannot be reversed unless the other person is willing to do the same. The identities are anonymous and hence the irreversibility risk is extreme.

Unregulated: Cryptocurrency is not backed by any financial institutions or government, unlike financial markets which are relatively safer as they’re been backed by a regulating authority that constantly strives for investor safety and interest.

Highly susceptible to hacking and cyber frauds: The increasing popularity of cryptocurrency has also drawn the attention of many hackers and scammers. Though crypto is strongly encrypted, it is still vulnerable to hackers looking for opportunities to commit frauds which one can avoid with the help of cryptocurrency risk management.

Cryptocurrency Risk Management in Trading

The cryptocurrency market is growing at a crazy pace. The beginning of 2021 illustrates this beautifully. According to CoinMarketCap, the total capitalization of the cryptocurrency market exceeded $1.36 trillion on 9th June 2021. Just to compare, back in March 2020, the market capitalization was estimated only at 160 billion.

As the market continues to grow rapidly, many people forget that crypto trading is not only about profits but also about risks. And if you don’t want to drain your deposit on the very first day, you have got to keep risk management rules in mind. The right strategy will help you to make a huge profit and decrease the risk of potential losses.

In cryptocurrency trading, the risk is the likelihood of losing invested funds. Therefore, cryptocurrency risk management is the ability to predict and control possible losses from an unsuccessful transaction.

Why is risk management so important?

Here is a simple example. You decided to invest in cryptocurrencies and bought Ripple, a relatively strong and stable project, for your entire deposit.

But unexpected things happen when you least expect them to happen (sarcastically) — XRP dropped. And dropped by as much as 50%. By the way, these are not abstract numbers. Just take a look at Ripple’s chart for the last year and you will see continuous ups and downs.

To sum up, you can lose half of your deposit just by carrying out one single deal. Of course, this is a very dramatic example. Even beginner traders rarely make such obvious mistakes.

Cryptocurrency Risk Management

Research important crypto coins: Before investing in any cryptocurrency makes sure you research it and invest as per your capacity. Investing just because you’re feeling left out or without consulting any investment advisor isn’t advisable.

Understand your reward/risk ratio: The reward to risk ratio is how much you stand to profit for every unit of currency you risk. Invest only that much that you are ready to risk.

Diversify your portfolio: Investing in many crypto coins can help to minimize the risk factors. A diversified portfolio minimizes the risk associated with the portfolio. Since investments made across different coins, the impact of volatility can combat. Some coins are extremely fluctuating while some are not.

Define your entry-exit strategies: Your entries and exits are an essential part of your trades. A great entry is the icing on the cake of a profitable trade, while with the exits, you are not just considering gains, but also losses. Planning your exit points is a crucial part of a solid cryptocurrency risk management strategy.

Everyone Takes Losses Sometimes; Hence Cryptocurrency Risk Management

In crypto, everyone will take losses here and there, including the pros.

That is the name of the game. The pros know when to take losses, how to manage their risk, and generally aim to make more good trades than bad ones (or, to make more good investments than bad ones). Further, pros don’t change their strategy based on emotion, they only respond to market conditions, price action, and fundamentals (so if they are going to go in heavier, it is for a reason).

Amateurs can get lucky by throwing cash at crypto at the right time, but luck can and usually do run out (and often at the worst times; like all-time highs or lows).

No one is going to magically be a pro out of the gate, but if you do yourself a favor and cryptocurrency risk management like a pro out of the gate (sticking to it even when the FOMO or fear kicks in), then you’ll avoid all the crazy crypto emotions and their related mistakes like a pro (allowing you to actually stick to your strategy), and thus you’ll give yourself the wiggle room to get crypto trading / investing right before you get REKT (Borrowed from online gaming slang, to mean utterly destroyed or ruined.).

An example of a REKT

If 100 people all go all-in on Bitcoin when they hear about it, then everyone who heard about it early has money on paper and everyone who heard about it late has losses. Meanwhile, if they all HODL, and then crypto crashes into the ground, they all have losses. Meanwhile, if they all HODL and it goes up, and then no one sells, they all just have on the paper wealth they aren’t doing anything with. In all these cases the effect is essentially the same.

Yet, if those 100 people all built average positions over time, and aim to take profits in some reasonable way, they would roughly be in the same boat (those who came in early would be a little better off, but all would have opportunities to profit and room to make more conservative and educated choices).

If you think two trips to $6k was the worst of what crypto has to offer, you do not know crypto. If you think the next all-time high will become the new support, you do not know crypto.

To survive the crypto coaster it is vital to have cash on hand and to be in a position that doesn’t consist of losses that are near impossible to make up.

Conclusion

Crypto has its pros and cons that one should consider before trying to trade or invest in it. For example, on one hand, crypto provides absolute secrecy and privacy which is great but on the other hand, the same privacy can hamper fraud detection and scams. So, choose wisely

Everything comes with its risks and perks. One should not blindly follow the trend, rather do his/her research and then pick what’s best suit for them. When investing, look into various techniques of cryptocurrency risk management in crypto trading to avoid any mishaps in the future. At this stage, it’s highly uncertain and volatile that can either make you filthy rich or a pauper!


Why Bitcoin Cloud Mining?

The Bitcoin network introduced to the world in 2009 by an unknown individual or group called Satoshi Nakamoto. In 2021, there are more than 10,000 different projects in the field of cryptocurrencies. Each of them has its role in building the future of money.

The market value of cryptocurrencies reached $ 1 trillion for the first time in January 2021. It passed $ 2.5 trillion less than three months later. It shows that this market is one of the growing markets in the favor of its investors.

Bitcoin Cloud Mining is the process by which you participate in a mining pool to a cloud miner website and purchase a certain amount of hash power. In this pool, the profit will distribute equally among all participants who have participated in the mining pool. It will happen based on hash power. The cloud miner platform allows you to mine your Bitcoin without installing any hardware and at no extra cost. Minerland, the best crypto cloud mining service, helps you invest in Bitcoin easily and with low risk.

One response to “5 Ways for Cryptocurrency Risk Management”

  1. Yanga Jili says:

    Manage your risks….Good article

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