The cryptocurrency industry is growing at breakneck speed. This is brilliantly shown at the start of the previous year. On June 9th, 2024, the entire capitalisation of the cryptocurrency market topped $1.36 trillion, according to CoinMarketCap. The market capitalisation was anticipated to be just 160 billion dollars to put things in perspective, in March 2020
Many individuals overlook how crypto investment is not just about earnings but also about hazards since the industry continues to develop swiftly. And, if you don’t want to lose your whole investment on the first day, you must follow risk management guidelines. The appropriate method may help you earn a lot of money while lowering your chance of losing money.
Risk in crypto trading refers to the possibility of losing money invested. As a result, risk management is the capacity to anticipate and mitigate potential losses from a failed transaction. When it comes to determining how to best manage cryptocurrency risks, risk managers often draw parallels between financial products and cryptocurrencies.
Why is it important?
Here’s an easy example. You chose to invest in cryptocurrencies and spent your whole deposit on Ripple, a pretty powerful and steady project.
But (sarcastically) surprising things happen when you least expect them – XRP fell. And it plummeted by as much as 50%. These are not conceptual numbers, by the way. Try taking a look at Ripple’s chart over the past year, and you’ll see that it’s been in a constant state of ups and downs.
Small quantities of your overall investable wealth set aside for crypto should always be used to invest and trade. It also helps to minimise your losses if you would be joining legitimate platforms whilst making well-informed investment selections. It is always a smart idea. The Bitcoin Motion review, for example, provides you with useful information and can potentially save you money in the long run by helping you choose a trustworthy broker.
Tips to minimise your losses in trading
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- Know the kind of profit you will make – Keep in mind that not every transaction will be lucrative. Even the most experienced traders lose money. Losing is unavoidable in trading; you must just accept it. The profit/loss ratio is the most important factor to consider. It should ideally be 3 to 1 or at least 2 to 1.
- Always try to diversify – If you invested your entire deposit in one cryptocurrency and it suddenly dropped by 50 per cent, you would lose half of your investment. Your loss would be less, though, if you owned ten assets and Ripple accounted for just 10 per cent of your total investment. Therefore, never ignore risk diversification. Always keep an eye on the market and diversify your holdings by investing in a variety of cryptocurrencies.
- Excuse your emotions from the trade – Traders are often led by feelings instead of rationality or careful calculations. This behaviour is also described with a specific term called FOMO, which stands for “fear of missing out.”
Around 95 per cent of cryptocurrency rookies lose money. The fundamental cause for this is a lack of risk management abilities, which may lead to rash actions. That’s why risk management is one of the most crucial components of cryptocurrency trading and how to utilise it to prevent losing your whole investment on the first day.
A single trade may cause you to lose half of your investment. This is, of course, a highly dramatic case. Even inexperienced traders seldom make such glaring errors. But the simple fact is that if you don’t have a risk management plan in place and trade instinctively, you will almost certainly lose money.
Conclusion
The growing institutional interest in cryptocurrency brings with it a slew of risk management issues that are specific to this fast-emerging alternative asset class. Crypto risk managers must overcome a number of challenges, including a lack of data, insufficient regulation, liquidity, modelling, valuation, and clearing and settlement difficulties.
Cryptocurrencies have quietly gained traction as an asset class over the last decade and are now drawing a growing number of institutional investors. The increased demand necessitates a more thorough examination of the underlying causes of risks and opportunities. The requests for enhanced risk management are part of the market’s maturing, which will eventually entail, among other things, the replacement of self-regulation and automated governance with effective supervisory and regulatory frameworks.
It remains to be seen if cryptocurrencies will eventually supplant fiat money to some degree. But one thing is certain: the path to a digital currency needs a set of criteria that is clear, comprehensive, and worldwide.
Risk managers must be aware of the hazards specific to this new asset class. Risk management aids in the reduction of losses. It may also assist traders in avoiding losing their whole investment. Traders are at risk when they suffer a loss. They may open themselves up to generating money in the market if risk can be handled.
