Cryptocurrencies are a nascent and highly volatile asset class. Since May, we’ve seen the total crypto market cap plunge more than 50% from $2.5 trillion to $1.2 trillion, and then slowly recover to $2.3 trillion. Volatility is not a risk, but many investors panicked and sold their crypto assets at loss during the downturn.
Every investment carries a certain degree of risk. It’s essential for investors and traders to assess them and create a mitigation strategy to reduce losses. Minimizing risks is as important as maximizing returns. Let’s take a quick look at the key risks facing crypto investors.
- Market risks: There are a number of factors at play that could move the price in the direction you didn’t expect. In the crypto industry, whales, hackers and regulators have shown that they have the power to influence the prices of coins.
- Liquidity risks: If a coin you own suffers from low liquidity, you’ll struggle to convert your tokens into fiat or another currency. You may be forced to sell at a lower price or wait a long time to find the right buyer.
- Behavioral risks: Investors by their behavior are their own enemies. If you don’t manage your emotions, your greed and fear would make you want to buy at the top and sell at the bottom.
- Operational risks: It’s when you are unable to access your tokens or withdraw them from a trading platform.
- Credit risks: What if the founders of a crypto project you are so excited about pull some shady sh*t or fail to fulfill their responsibilities? That’s credit risk for you. Fraud and theft also fall in this category.
- Systematic risks: These are the scenarios when for some reason people lose trust in the crypto industry or global regulators come together to shut down the crypto ecosystem. The risk of the entire industry vanishing into thin air.
How to Minimize Risk
Now that you have a basic understanding of the risks crypto investors face, let’s discuss a few ways to reduce the risk. Remember that risk can never be fully eliminated. It can only be minimized, delayed or transferred to someone else. The ultimate goal for any investor is to maximize returns while minimizing risks.
1. Choose a trading platform where your money is yours only
Make sure that the platform you are using to trade and hold your crypto will keep your assets safe even in the worst-case scenario. Your money should be yours, and only yours, even in the event of hacking or theft.
Most trading platforms are cloud-based, meaning they keep your API keys on their servers and they can access them anytime. On top of that, they offer custodial wallets. In an industry where hacking and theft are prevalent, it’s not wise to use custodial wallets because they have your private keys. They can restrict your access to your own wallet or seize your assets if they want. If the platform gets hacked, the attackers could access your wallet and steal your crypto.
It’s wise to use a secure non-custodial wallet such as those offered by Atani. For the uninitiated, Atani is a trading platform that allows users to trade on almost two dozen crypto exchanges through a single app. Its non-custodial desktop wallet stores your API keys locally on your device, not on Atani servers. And the API keys are encrypted using military-grade AES-256 encryption. Even if Atani gets hacked, the hackers will never be able to access your wallet.
2. Research about the coin
Don’t outsource your research to analysts and experts. Analysts are often wrong, and most experts on social media have their own agenda for pumping a coin. And don’t buy a coin just because you have heard its name a few times.
Do an in-depth research because you are putting your hard-earned money on the line. Learn about the coin, the problem it aims to solve, the founding team, history, daily volume traded, community, tokenomics, etc. There have been a lot of "shitcoins" flooding the market since last year, trying to capitalize on the crypto boom. They don’t have much real-world utility.
3. Start small and dollar-cost average
This helps minimize the behavioral risks and gives you the time to learn crypto trading and investing first-hand if you are just starting out. Treat crypto like a high-risk, high-reward asset.
Most newbies should start small by investing 1-2% of their crypto portfolio in a token. The winners will grow to become 5-10% of your crypto portfolio. And depending on your research and conviction, you can add to winners over a period of time.
Buying a little bit at a fixed interval over a long period of time enables you to accumulate without having to worry about overpaying. You’ll be buying when it’s up 50% as well as when it’s down 50%. Dollar-cost averaging helps you navigate volatility and accumulate more when the price is down.
4. Diversify your portfolio
You are aware of the rule "Never put all your eggs in one basket." Diversification is a reasonable approach because it dramatically reduces the risk of being wiped out. Here are a few ways to diversify your crypto portfolio:
- By holding a wide variety of investments in your portfolio.
- By investing in coins that tackle different issues for a different set of users and industries.
- By investing in crypto projects from different regions and countries to shield your portfolio from regional regulatory uncertainties.
- By investing in assets over a long period of time. Time diversification aka dollar-cost averaging is one of the most underrated diversification strategies.
5. Considering hedging
Investors who have made speculative bets can minimize the downside risk by using options. Premia Finance is an Ethereum-based protocol that offers options trading for a wide range of native Ethereum and Binance Smart Chain tokens to enable traders to boost profits and reduce the downside risk. It also has a secondary marketplace where you can carry out peer-to-peer transactions.
For the uninitiated, an option is a derivative contract that gives you the right, but not the obligation, to buy or sell the underlying crypto asset at a predetermined price on or before the expiration date. A "call" option is the right to buy while a "put" option is the right to sell. Traders can use the call and put options to reduce the risk at a low cost.
6. Avoid leverage
Investing in a highly volatile and speculative asset class is risky enough. Investors, especially noobs, should avoid leverage because it diminishes your chances of survival if something goes wrong. Invest the amount that you don’t immediately need and can risk losing in the market. While borrowing could amplify your returns, it could also dramatically increase your losses if the price doesn’t move in your expected direction.
With just a little bit of precaution, knowledge and self-control, it’s easy to reduce the risk in your crypto portfolio. As the crypto landscape continues to evolve, you’ll evolve as an investor too, exploring more opportunities and learning new lessons that would help you make smarter choices.