One of the things that makes cryptocurrency trading unique compared to other financial instruments is that you are not just trading an “asset” in the conventional sense. On the contrary, what you invest in is technology.
Indeed, cryptocurrencies are not only digital stores of wealth that can be used to transact, they are also a complete digital ecosystem that has an almost limitless number of potential uses.
While this is arguably what makes cryptocurrencies so unique and interesting to invest in, it is also one of the main sources of risk associated with investing in them. And maybe that’s why those interested in crypto tend to pay very close attention to the OKX cryptocurrency price on a daily basis.
Although it has a reputation for being a somewhat risky investment – especially compared to other more traditional investments, such as stocks, commodities or bonds – there are nevertheless some things you can do to manage your risk when investing in cryptocurrencies.
Although some of them are general risk management tips that you should always pay attention to and implement where possible, others are more specific to the cryptocurrency industry.
Before exploring some of the techniques, strategies and considerations for managing your risk, we must first briefly define what the sources of cryptocurrency risk are. There are various sources of risk associated with cryptocurrencies, although the following are arguably the most important to keep in mind:
- Legality and Regulation: There is still considerable uncertainty about how best to regulate crypto assets. This is all the more important as governments around the world – with some exceptions – have been relatively slow to regulate them. Finding reliable crypto assets to invest in can be tricky, due to eis obvious lack of regulatory authorities to contact in case of problems.
- Security Risks: Bitcoin exchanges have been subject to a number of high profile hacks in recent years, many of which are due to illegal network access or 2-factor authentication hacks. Many cryptocurrency investors still lack the proper security training to keep them safe online. This is a particular problem, given that many people store their crypto assets on online exchanges, rather than in “cold storage”.
- Trading Risks: There are a number of risks associated with crypto trading, most of which boil down to market price volatility. Cryptocurrencies can often be subject to quite large fluctuations in daily price trends, which makes risk mitigation strategies difficult to implement. There can also be liquidity risks when so-called “whale” traders throw large volumes of cryptocurrencies into the market with little warning.
Cryptocurrency Trading and Investing Risk Strategies
With these risks in mind, let’s look at some of the risk management strategies you can adopt to mitigate them:
- Don’t over-leverage yourself: Trading on leverage is naturally a very tempting prospect. While we recognize the temptation to magnify your potential trading gains by using leverage, we also recognize that you should only ever use leverage in a modest way. Overexploit your positions – – may put you at considerable risk of loss if the market turns against you. And remember, the risk with leveraged trading is that while your gains are magnified, your losses are too much!
- Only ever trade with what you can afford to lose: a good general rule to put in place – especially when trading an experimental investment, such as crypto – is to only invest what you can afford to lose. While this will obviously impact the amount of profit you can make, it will also ensure that you are never too hard hit by losses!
- Use Multiple Time Frames: While historical price analysis is an inevitable part of developing and implementing a trading strategy, you should always be careful never to focus exclusively on a narrower view. Being too narrow in the timeframes you look at can cause you to overlook or miss more important historical trends worth noting.
- Don’t Forget Your Stop-Loss Orders: A risk mitigation tip that can be applied to any asset is to always make sure you use stop-loss orders. These can be used to protect you from further price declines if the market turns against your position. Always place stop-loss orders in advance to avoid unnecessary losses. These will be particularly useful in circumstances where you do not pay close attention to the new and risk missing an opportunity to close your trades!