Crypto risk management

A famous proverb says: “Who doesn’t risk, doesn’t drink champagne”. We cannot agree more, especially when it comes to the cryptocurrency market. It’s no secret that this industry is changing every minute and, just like any other sphere connected with finances, involves numerous risks. Therefore, crypto risk management is one of the first things you need to learn before starting to buy and sell coins. In today’s blog post, we will discuss the types and pros of risk management, as well as the best strategies to eliminate potential risks of the cryptocurrency market.

What is risk management

Let’s start with a simple and clear definition. Risk is the probability of undesired outcomes happening in trade (crypto assets, stocks, real estate, etc.). Risk management, in its turn, is proper and considerate handling of any potential risks and threats to receive maximum possible profit.

Risk management is often neglected not only by crypto trading news but even by professional investors. What’s more, dealing with risks gets more challenging and hectic in stressful conditions, like an unpredicted economic crisis, changes in politics (both domestic and international), and so on.

The cryptocurrency market is extremely volatile and depends on numerous factors. Nevertheless, it remains highly profitable and will be on-trend at least for the next few years. The value of crypto projects adjusts and reacts to both small and large local and global events. That is why well-thought risk management helps to prevent any financial losses and gain profit.

What are the risks of crypto assets

We will now talk more about risk factors to understand better how to handle them (applicable both to crypto and other industries).

• Market risk

It’s the possibility of losing investments due to the factors that influence a particular market in general. For instance, even such things as terrorist attacks and natural disasters are significant because they can change the market drastically but are pretty unpredictable.

• Legal risk

These are connected with lawful regulations. While talking about crypto trading, investors should consider the legitimacy of cryptocurrency transactions and exchanges they’re using, allowance or ban on trading, taxation, and, basically, anything related to the legal aspect. These rules vary from country to country and even from state to state in the US, for example.

• Operational risk

Such inherent risks come from internal issues with systems and people and disrupt the whole flow of business and financial operations. In the crypto world, operational risks are any risks that result in traders being unable to deposit, withdraw, and even trade within their cryptocurrency wallets. The reason for such complications can be anything from technical issues or losing access to your account.

• Credit risk

This type of risk happens when crypto coins’ issuers fail to meet their obligations. In the majority of cases, it’s associated with fraud and theft.

• Liquidity risk 

These are the risks of a party being unable to meet their short-term obligations or do so at a sustainable price. With regards to cryptocurrency, such situations occur when traders cannot convert their positions to fiat currencies at reasonable rates. So, on the one hand, you possess coins, and they are valuable. On the other hand, you cannot really use them or get real money.

Pros of crypto risk management 

Risk management is based on facts and numbers rather than gut feeling and intuition. That is why making use of risk management has some serious advantages, no matter whether you’re trading stock, real estate, or cryptocurrencies.

With a clear picture of what’s going on and what can happen on the market in the future, you will better see the possibilities to make income.

• Timely risk identification

Risk management allows us to spot risk factors in no time and handle them accordingly.

• Reduced chances of unexpected losses

Better informed, better prepared. This rule is a perfect illustration of crypto risk management because you’re more prone to any surprises that may result in unforeseen profit losses.

Crypto risk management advice

Undoubtedly, there’s no one win strategy to avoid all possible cryptocurrency risks. However, the best approach in any trading is, in fact, to consider the risks and, based on this information, to make the right decision that will help to earn sufficient income.

CoinCasso is a cryptocurrency exchange with its own CCX token. We’ve been on the crypto market for 3 years now and are well aware of how crucial risk management is for traders. We’ve prepared some practical tips to buy and sell coins safely and maximize profits:

• Foreknowledge

Take your time to do in-depth research and analysis of the crypto market, the most popular and profitable projects, the best crypto exchanges, the latest tendencies, etc. This preparation stage can take a long time but it’s always better to be prepared. Don’t just invest in Bitcoin or Ethereum because they’re the major players. With a proper understanding of how the crypto market works, your reactions in critical situations will be based on sharp knowledge rather than emotions and instincts. And cryptocurrency trading is definitely not a place to try your luck.

• Widely diversified portfolio

This will prevent you from losing all the money in one moment. The more coins you have – the higher your chances of actually making a profit than going bankrupt.

• Transaction profitability

Before entering the actual trade, you should accept and remember the fact that not all deals will bring more money. It’s just a matter of statistics and probability theory. Fortunately, it’s possible to calculate the profit/loss ratio and stick to it to evaluate your success in trading. Most experts agree that this correlation should be 3/1 or 2/1. Otherwise, it’s advised to stop making deals to avoid losing all your investments or even going bankrupt.

• Trade size

Once again, in crypto trading, we should be guided by logic, facts, and numbers rather than emotions. There are two essential rules to follow here: 6% and 2%. The first one says that you should stop making deals if you keep on losing funds and have already spent 6% of a deposit. According to the 2% rule, you shouldn’t open a position with a larger sum than this percentage of your whole deposit. Finally, you’re not recommended to invest more than 10% of your monthly income in crypto or do this with borrowed money. The risks of losing everything during a short time are still very high.