Strategies and practices to minimize trading risks in cryptocurrency market.
Since the past year, the world has witnessed several unprecedented circumstances. Among these events, the cryptocurrency market has been volatile due to several ongoing uncertainties, but one cannot deny the fact that as unpredictable it is, it’s an extremely profitable investment too.
Halfway through 2021, several studies have indicated immense growth in the cryptocurrency market. With each passing day, we’re being exposed to new developments and cryptocurrency trends that are going to shape the future of finance. As the world is moving towards a digital era, cryptocurrency might be an extremely valuable asset for people. Many experts believe that blockchain and related technologies are going to positively disrupt several industries. Unlike traditional transactional methods, cryptocurrency makes it easier to transfer funds directly between two parties, without the intervention of any third party like a bank or credit card company. This accelerates the speed of transactions and reduces the number of parties involved, making it a highly lucrative investment.
However, while the virtual currency market may appear tempting, there are certain risks that come along with it. The semi-anonymous nature of the currency and the fluctuation in rates, along with several other factors might make it susceptible to risks. In this article, we explore the possible risks surrounding cryptocurrency trading, and easy strategies to minimize those risks.
Risks in cryptocurrency trading
Every investment comes with a certain degree of risk. But nothing great is risk-free! Here are a few risks that you can monitor while trading in cryptocurrency.
Market risk and volatility
Unexpected market changes and the upward or downward fluctuation of the market make trading quite volatile. The price of digital assets depends on several external factors, some of which cannot be controlled. Hence, investing in cryptocurrency always has an associated market risk.
Errors and hacking concerns
Just like any digital asset, cryptocurrency is susceptible to technical glitches, which may lead to hacking and security concerns. There is a certain amount of risk of unethical behavior, fraud, and theft through phishing and malware.
Unregulated currency risks
Since cryptocurrency is a decentralized currency, there is no third-party like the central government or central banks regulating it. They are monitored by peer-to-peer internet protocol, which means that there is no governing body regulating the price fluctuations. Thus, this may lead to certain risks.
Since cryptocurrency entirely works virtually, there are chances of operational malfunctions where traders might not be able to withdraw their crypto tokens from a specific project or company.
In essence, a fork is a change in the blockchain’s protocol, which decides whether the transaction is valid or not. A fork can have a substantial impact on the cryptocurrency since it is often followed by large price fluctuations. Hence, it becomes quite risky when such a change occurs and the market becomes volatile.
Strategies to Minimize Trading Risks
Investments in the cryptocurrency market are not always risky. A well planned strategy can help in minimizing risks to a great extent.
Diversify your crypto portfolio
It is a well-known strategy to diversify your investment, and not restrict your funds to one thing. A diversified crypto portfolio would mean investing in multiple digital currency tokens, rather than just one. This drastically reduces the risk factor because even if one of them fails to perform, you have the rest secured.
Traders use a variety of techniques to diversify their investments. One of the popular strategies involves assigning a certain percentage to safe assets, and the remaining in risky assets. This will ensure that the risk is not huge.
Creating a cryptocurrency fund can help in reducing risks to a great extent. A fund is a professionally managed set of assets spread across a diverse range of investments. An expert, who is much more knowledgeable in this field is paid to manage these funds on behalf of multiple clients. Since your assets are joined with multiple people’s assets, the fund manager can spread them across a huge number of platforms. Thus, even though you might experience losses, they will be absorbed by the gains that you acquire from other sources.
This is a great strategy to minimize risks for any kind of investment since the potential of losses gets lowered drastically, while your portfolio is managed by an expert.
In several cases, traders invest a huge chunk of their capital without any trading plan and eventually face losses in the event of a market crash. With this strategy, you can develop a defined trading plan, while keeping in mind factors such as the percentage of risks willing to take in each investment, diversification of funds in multiple currencies, setting stop-loss limits and more.
Hence, position sizing can help in reducing potential losses by developing a plan where the loss is limited to your desired limit.
Booking your profit
Two well-known strategies to reduce risks are Stop Loss and Take Profit. Essentially, these techniques help you to stop your losses and book profits. In the Stop Loss strategy, one automatically closes the trade if the price of an asset falls below a defined limit. On the other hand, the Take Profit strategy involves the automatic liquidation of a trade if the price of an asset goes above the desired limit.
This strategy is quite helpful in minimizing risks involved in cryptocurrency trading since it helps to keep a check on the profit and loss balance. Moreover, it even acts as an aid to exit the trade before the market becomes unstable.
In conclusion, investments in cryptocurrency are not risk-free. However, with a defined strategy and constant monitoring, the risks can be converted into potential profits. Moreover, as the world is becoming cashless, digital currencies are gaining immense popularity. In the past few years, cryptocurrencies have gotten massive momentum, and it seems to be the future of finance. Overall, with the correct guidance and risk management strategies, cryptocurrency is a good investment to make.