The crypto industry has witnessed institutional interests and retail traders drawing their attention towards this space in the recent past. But while the crypto industry is gaining traction at a rapid scale, cryptocurrency trading also carries a certain degree of risks.
It is therefore important to understand how to manage risks. It will not only help protect your investments but will also help you identify the risks you accept when you trade your funds in the crypto market. In this article, we take a look at a few strategies that will help you minimize risks while trading and investing in crypto.
Types of Crypto Trading Risks
Investing in crypto markets carries a certain degree of risk. Assessing these risks and identifying strategies help mitigate them and prevent further losses.
Market risks are when the price of digital assets move upwards or downwards depending on many factors.
When a trader is unable to convert their cryptocurrency into fiat currencies which can be used in everyday expenses, it is known as liquidity risk. Such a risk arises due to trading in low-volume markets.
Credit risk is the inability of parties involved in the crypto project to fulfill their duties. This kind of risk is mostly associated with theft and other cybercrimes in the digital system.
Operational risk is the hardest risk for a trader as he or she cannot buy, sell, deposit or process a withdrawal from their wallets. This could be due to operational malfunctions.
Systemic risk refers to the failure of an overall crypto industry or any other financial market as customers lose trust in the system.
Top Strategies to Minimize Risk in Crypto Trading
Crypto trading requires a trader or an investor to strategically act so as to minimize the loss amount. Some of the most effective strategies are listed below.
Position sizing is one of the most important risk management strategies in cryptocurrency trading. The probability of realizing consistent profits in crypto trading tempts traders to invest 30%, 50%, or even 100% of their trading capital. But when traders invest a high percentage of their capital without any trading plan, it could lead to high losses in case the crypto market crashes. To put things into perspective, in 2018, the crypto market crashed, and the prices of some crypto coins slashed by 90%.
The inherent nature of cryptocurrencies is the violent and rapid swings. These swings can bring a large amount of profit in a short period. Similarly, it could lead to massive losses pretty quickly. Let us assume an investor invests 10,000 bucks. And the investment quickly grew to 20,000. A prudent thing to do here might be taking out the original 10k off the investment. Now the investor has no risk of losing her capital. The remaining 10,000 continue to ride and reap profits. Even if the market crashes and the 10,000 now falls to 2,000 bucks, the investor would have no reason to worry.
This example is only for illustrations, and the profit booking aspect will vary from investor to investor. Some investors prefer to book profits at certain stages, taking out small amounts off the table. Some might argue that it would potentially take away some part of the profit. However, the most vital factor here is, as and when some money is taken off the table after an investment has grown, the risk of loss of capital reduces.
Position sizing, therefore, helps traders define how much they are willing to lose. Keeping that in mind you can create a plan to keep losses within a desired limit.
The risk/reward ratio or R/R calculates the risk a trader is taking for receiving potential rewards. It helps analyze potential rewards for every $1 that a trader invests. The riskier a position, the more profitable it can get.
To calculate the risk/reward ratio, the maximum risk is divided by net target profit. Let’s say that you buy 1 BTC (Bitcoin) with a target to exit the position at 10% profits. You can set a stop loss of 5% to minimize your losses. Your R/R ratio when calculated is 5/10=1:2. Therefore, for each dollar that you risk, your potential gains are twice.
Stop Loss and Take Profit
Stop loss and take profit are two different strategies that help minimize your losses and earn you profits. Stop loss is the automatic closing of a trade when the price of an asset falls. One the other hand, take profit is when the price of an asset rises to a specified level.
Implementing these strategies will help you take the emotional factor out of a trade. Furthermore, it also aids in exiting a trade before the market turns against you.
Crypto indexing refers to diversifying your crypto investments by not putting all your eggs in one basket. It is the act of investing in multiple cryptocurrency tokens to reduce risk in case one or more coins don’t perform. There are different strategies that traders make the most of for crypto indexing. These strategies involve assigning a percentage to safe assets and risky assets.
Adopting the best strategies for your crypto assets can go a long way. You can also consider tools that can help reduce investment risks and keep them secure. But before you invest in crypto trading, you should do a thorough analysis of the platforms and cryptocurrencies you wish to choose.
You can seamlessly invest in expert trading strategies through automated trading bots with Mudrex. Mudrex does everything for you from the exchange through API keys and does not require any withdrawal permissions. It is safe to say, Mudrex is the high-performing automated trading platform you are looking for.
Let your trades work on autopilot. Get consistent returns with Mudrex.Join Us Today!