7 Tips to Manage Your Risk In Crypto

“Manage your risk in crypto, or the market will manage it for you” 

Write this down somewhere and contemplate it often. 

Crypto is a very high risk market. Scams, volatility, hacks, exploits, and just straight up failure rates remain very high. It is thus essential to protect yourself as an investor in this asset class. One of the best ways to do that is by taking risk management seriously. 

One of the most common mistakes I see with investors is failing to manage their risk. And to be clear, everything you can do financially is a risk, including sitting in cash. The question becomes: what kind of risks are you willing to take and are you taking enough or too much risk? Too little risk, and you can dramatically underperform the market, too much risk, and, well, you can lose it all. 

The trick is getting it right. 

Here is some math for you to remember. 

• To recover from a 20% loss you need a 25% gain, which is tough but achievable.
• To recover from a 50% loss you need a 100% gain, this is crypto so anything is possible.
• To recover from a 75% loss you need a 300%, FML 🙁

Ideally, you want to avoid crushing losses like this. So here are some tips to keep in mind when adventuring in the wild world of crypto. 

1. Position Sizing

Keep position sizes low on high-risk altcoins, high-risk farms, and trading positions. While going all in is tempting, you always need to ensure you can live to invest another day. It is up to you to decide what exactly your personal risk tolerance level is. But here are some ideas. 

• High risk defi farm, risk no more than 5% of your stablecoins. Yes, there is less upside, but the loss if that farm is hacked might suck, but is manageable. 
• Any single trade must define a risk factor to position size as well. Is that right number 2%, 5%, or 10%? Part of that will depend on the size of your trading portfolio. But, always remember you do not want to put 100% of your capital into a single trade. 
• Altcoins are also a key area of risk for investors. I know that hot new coin may seem awesome, so you should definitely go all in. But chances are you are wrong and it will crash and burn. That is just the reality of altcoins. When entering a new altcoin position generally no more than 1-5% will be enough. This limits the downside risk, and if you are right and this is the next 100X then you still make great gains. 

2. Take Profits.

You never make money if you never sell. Straight up. Write this down somewhere. “No one ever lost money taking profit”. Why I mention this as part of your risk management strategy? Because reducing positions and cashing out is essential to managing risk. If an altcoin gets to be worth 20 or 30% if your portfolio then it is probably time to rebalance and that means taking profits and clicking that sell button. Take those profits and either hold it in cash for the next opportunity or reinvest into Bitcoin, stocks, metals, etc. 

Pro tip: get your capital out early. If a coin you hold just did a 5X, then remove your initial capital. This suddenly turns this position into a free bag that you can’t lose on because none of your real money is in it. Psychologically this can feel great! 

3. Be Ready to be Wrong

You will be wrong, get used to it. Be ready to cut those losers when the time comes. It is a sad truth, but many of the altcoins are garbage. And they will fail. Don’t beat yourself up for buying a dud, but also you don’t need to hold that coin until it hits -99.99%. You can sell and take the loss, get a tax write off, and preserve a little bit of your capital. Being able to look at yourself in the mirror and say “I made a mistake” is a very important skill to develop. Plus, cutting a loser frees up mental space and allows you to focus on the winners. Cut the losers early and hold the winners longer! 

4. Understand Your Risk Profile

If you are risk averse and happy with smaller, longer-term gains, then stick to the top coins. Bitcoin and Ethereum still have the potential to make nice gains for investors, and these are the least risky options in the market. But, if you are looking to “make it big”, then lower cap altcoins is how to do it. Just understand the risk profile is totally different. 

5. Never Invest More Than You Can Afford to Lose.

Literally, the most basic rule, but many don’t understand why this is so important. The market can remain irrational longer than you can remain solvent. If you have too much at risk, it will totally screw your head up and bad decisions will compound into more bad decisions and greater loss.

6. Keep Leverage to a Minimum.

Leverage can be a good tool in the right situations, but this market is very volatile and taking big leveraged positions whether trading or lending can get you into trouble real fast. 

7. Diversify

Crypto is great fun and the gains potential is insane compared to traditional markets, but it is also insanely volatile. Crypto should only ever be a part of your investing portfolio. Never the entire thing. A well diversified portfolio will contain: 

1. Cash: It is essential to always maintain a good cash position. Both for safety purposes and for taking advantage of opportunities. 
2. Metals: Gold and silver are long time favorites of the investing world. While they may not bring in super gains, they can make a nice addition to your portfolio. 
3. Stocks: there are so many great companies out there that you can own a piece of, and the best part is you can get profits from it. While crypto and stocks generally move together, the stock market can still be a great place to park cash.  
4. Real Estate: Is the OG of investing. It has plenty of its own challenges for sure, but rental income can be a game changer for you, and long term capital gains growth can make a big difference to your bottom line. 

While you can’t erase the factor from crypto, with the right strategies you can at least mitigate the effects that crypto volatility can have on your portfolio.