Since its launch, Cryptocurrency raises a bunch of questions in people’s minds. Though there are a lot of investors who had and still have believes in the potential of Cryptocurrency. But a huge part of the investor does not have any faith in this Crypto concept. Putting your money in the Crypto market is always full of risks and also the chances of getting massive returns. But most people only focus on the returns and not the risk.
Risk Management Types
In the Crypto world, you will encounter five types of financial risks. Read here more for following
1. Legal Risk
The probability of occurring any adverse event against the regulatory rules is considered as legal risk. Have you heard of a Crypto banned in any specific country? Yes, that will be the legal case. If a government bans Cryptocurrencies, you may face legal risks. In case you want a practical example, due to some fraudulent activities, North Carolina and Texas had issued a cease and desist order for Bitconnect.
2. Credit Risk
If the parties behind a specific Crypto project are unable to fulfill their due obligations, it will be credit risks. It directly impacts that Crypto operation. If any theft or fraud occurs in the Crypto market. Over $40 million loss occurred to Binance due to hacking in 2018.
3. Liquidity Risk
If a trader was unable to convert his entire position to fiat currencies like euros, dollars, etc., it is called liquidity risk.
4. Operational Risk
There are also chances of a trading failure. If a trader fails to trade, withdraw and deposit money in their Cryptocurrency or Bitcoin wallets. It is called operational risks, as the risks are directly connected with the operation execution.
5. Market Risk
If you know anything about the Crypto world, you may be accustomed to the sudden rise and sudden fall of the price values of Cryptocurrencies. This is considered as the market risk of Cryptocurrencies or Bitcoins.
How To Manage Crypto Investing Risks
The thumb rule of the Crypto market is never to mistake more than what you can afford to lose. Generally, a trader should not invest more than 10% of their monthly revenue or budget. Here are some risk management strategy that you can follow
- Position seizing is one of the most effective risk management strategies. It dictates the number of tokens or coins of a Cryptocurrency that you want to buy. Due to its significant profit margins, traders tend to invest 30% or 50%, or even 100% of their all trading capital. But this dangerous move can harm your financial health. You can determine the position seizing with the help of different methods or tools.
- Now come to the risk-reward ratio. This risk-reward ratio implies the comparison between the risk factors and the potential returns. Trading says that the riskier it will be, there will be more chances to gain profit. You will get to know when you need to invest. The risk-rise ratio is excellent. You can calculate the risk-reward ratio by the following calculation methods.
Risk-reward ratio (R) = (Target Price – Entry Price) / (Entry Price – Stop Loss). In case the result or the risk-reward ratio is less than 1:1, traders should avoid trading.
- If the price decreases to a particular barrier, an executable order asks to stop an open position, it is addressed as Stop Loss. On the other hand, order execution for liquidates open orders when the price has risen to an impressive amount. Both are excellent strategies in the Crypto market. Stop loss will keep you away from unprofitable deals. However, take profit will guide you for getting out of the trade prior to the market turns against you.
Now, as you get the idea about the risks you will encounter while trying your luck in the world of Cryptocurrency, you can also calculate the risk factors and manage your risks for better returns. Investing in Cryptocurrency is far different than investing in the stock market or real estate. Keep all these risk factors in mind and prepare your risk management strategy wisely.