The crypto market is a highly volatile and rapidly changing industry, making it a challenging investment environment for investors. However, with appropriate applied strategies, you can manage risks and protect your investments. Risk is an unavoidable factor in investing, especially in the crypto market. A successful investor is one who can balance risk and reward.
I. Why Risk Management is Necessary?
Because in financial markets in general, and the crypto market specifically, everything is probabilistic, and nothing can be certain 100%. Unexpected factors can always arise, which is why good risk management helps minimize losses. While other factors like knowledge, time, experience, and understanding are crucial, not knowing how to manage risk can potentially wipe out all your earnings in an instant.
II. Risk Management Strategies
1.Portfolio Diversification
a. Adjust Portfolio According to Risk Levels
Divide your investment portfolio into high-risk, medium-risk, and low-risk categories. Then, allocate appropriate proportions based on your individual investment style. A portfolio heavily weighted towards high-risk investments can be imbalanced. Profit often comes with risk, so balancing your portfolio and managing risk involves diversifying your crypto assets according to your investment style.
b. Allocate Capital Wisely
Because there's always a risk in investing, you need to allocate your capital wisely. The future is unpredictable, and you can't be certain that any of your investments will win 100%. Even with thorough analysis, unexpected events can happen. Therefore, planning how to allocate capital among different cryptocurrencies will make you feel more comfortable, as you've spread the risk across a range of assets.
c. Regularly Monitor Investment Progress
We can't always predict market changes accurately, leading to losses and portfolio burnouts. Therefore, you should monitor your assets to eliminate risks from misjudging market trends. Using cryptocurrency portfolio management apps helps investors stay on top of their accounts and make appropriate adjustments. Be responsible for the money you invest!
Some portfolio management tools:
CoinTracking: Offers various portfolio tracking features, including real-time balance updates and profit/loss tracking.
CryptoCompare: Provides portfolio tracking functionality, allowing you to view your portfolio's real-time value and historical performance data.
2.Avoid Letting Emotions Affect Your Trades
Personal emotions are the number one enemy of traders in financial markets. When a decision is based on emotional factors, it's not truly honest or objective. Here are some tips for controlling emotions while trading:
a. Maintain a Long-Term Perspective: Crypto markets can be highly volatile in the short term, so it's important to have a long-term view and not get caught up in short-term fluctuations.
b. Don't Chase Profits: Avoid the temptation to chase profits by investing in a cryptocurrency or project just because it's surging in value. Instead, stick to your investment thesis and focus on fundamental principles.
c. Don't Panic: If the value of your investment, don't panic and sell off your portfolio. Instead, take a step back, review your investment thesis, and determine if the investment still holds value.
d. Avoid FOMO (Fear of Missing Out): FOMO is a common emotion in the crypto market. Don't feel compelled to invest in a cryptocurrency or project just because others are doing so.
e. Avoid Overreacting: Avoid overreacting to news or market conditions. Instead, take the time to research and understand the situation before making any investment decisions.
f. Take Breaks: If you find yourself emotionally invested in your trades, take breaks and come back with a clear, rational mindset.
Avoid Overtrading
It's essential not to trade excessively, as overtrading can lead to poor investment decisions and excessive trading costs, sometimes without covering profits. Frequent trading can also lead to incorrect investment decisions due to emotions like fear, greed, and overconfidence. It's challenging to time the market, and if you're constantly trading, you may miss long-term profits while bearing short-term losses. Trading too often can indicate impatience, a critical quality in the cryptocurrency market, where short-term volatility is common.
Note: There will be unexpected events in life and in the crypto market, so be flexible in adjusting your plans. Only sell or adjust your long-term coin portfolio for the following reasons:
*When you need the money for essential living expenses.
*When you want to rebalance your investment portfolio by adjusting asset allocations to optimize profit and minimize risk.
*When you need funds for reinvesting in your portfolio, such as selling some BTC to allocate it to a more promising coin.
