The key to successful cryptocurrency investing is learning to manage risks and avoid loss of capital as much as possible.
Better to have your capital intact than losing it by chasing every shiny looking opportunities.
In this post, I will be sharing with you how I think one can effectively manage risks and make profitable crypto investments.
How to manage risks in crypto
Pick your projects carefully based on fundamentals
Stay up to date on project and crypto market developments
Diversify both your wallets and portfolio
Only invest as much as you can afford to HODL
Be quick to react when your initial hypothesis is proven wrong
Let's briefly examine each of these risk management strategies above.
1. Invest based on strong fundamentals
I'm always impressed by people who just wake up in the morning and buy a token everyone is talking about on Twitter.
Or worse, some people even go to CoinMarketCap or CoinGecko and buy the coin or token with the biggest loss in the past 24 hours.
Even the US navy seals will salute such acts of bravery, or should I call it carelessness?
Crypto makes it so easy to make and lose money that most people hardly give any serious thought before spending their money on a project.
Imagine for a moment that you just collected your monthly salary.
Would you just hop onto the next plane to Paris and start buying anything and everything you find that your money can buy?
I guess no.
You will think about how much you have. Make a list of all the things you need and want.
And then prioritize them. You will want to buy some now. Others next month and probably put some of that money into a savings plan.
The same should happen with your crypto investments.
You're spending real money and some thoughts must go into the process.
What coins are you buying? Why are you buying them? Why do you think they will be successful in the long term?
Do they have strong fundamentals? If yes, go ahead and buy.
If you don't have good answers to some of the questions, regarding their long term sustainability, you may want to slow down or avoid them entirely.
Click here to learn how to perform a cryptocurrency fundamental analysis all by yourself.
Invest only in projects with strong fundamentals and you would be saving yourself from lots of semi heart attacks in the days, weeks, and months ahead.
2. Stay up to date on project and market developments
The cryptocurrency market is moving at the speed of sound.
Things happen very fast, and if you're not up to date, you could be easily left behind.
You must not only stay up to date with what's happening with the project(s) you're invested in.
You have to keep yourself abreast of what's happening in the entire crypto market as much as you can.
This will help you understand what direction the industry is taking, the various factors shaping the industry and how all of these affects the project you're invested in.
Which in turn helps you to make intelligent and informed decisions regarding what you buy, what you do with them, and when you sell etc.
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3. Diversify both your wallets and portfolio
Spreading yourself too thin in the name of diversification is bad. Not di verifying at all is worst.
The idea then is to maintain a healthy balance between diversifying your risks and maintaining rock-solid positions in good projects.
Diversification isn't only about how many coins or tokens you have in your portfolio.
It also includes how many wallets you use to store and manage your cryptocurrencies.
Personally, I am invested in a maximum of 5 to 10 different coins at a time.
And they're spread among 2 to 5 different wallets.
Why?
Because there's a limit to how many coins you efficiently follow up with their developments.
Plus should you lose your private key or get one of your wallets compromised, you will not be losing all of your cryptos at once.
That is why you should diversify both your portfolio and their storage.
4. Only invest as much as you can afford to HODL
People always say, only invest as much as you can afford to lose.
But I am not investing to lose. I am investing to make money.
So I say only invest as much as you can afford to HODL longer than you planned.
The crypto market can go through an extended period of a market correction.
Some could last for years or a few months. And these corrections can be sometimes deep.
Imagine losing 70% in a day, not due to scam or project failure but normal market movements.
Call it whales manipulation of whatever, these kinds of corrections happen even with the big coins like Bitcoin.
And you have to be prepared to HODL through these trying times.
If you invest money that you need for your living expenses, you may be taking too much of a risk as your livelihood could be easily affected by the frequent irrational crypto market movements.
5. Be quick to react when your initial hypothesis is proven wrong
Don't suffer from escalated commitments.
If the reasons you bought into a coin or token is no longer valid or you discovered that you were totally wrong, or the project has taken a direction that no longer makes sense, sell that shitcoin and cut your losses.
It's better to lose 50% than 99%.
In some cases, you can't even determine the status of a project. For example, I invested in KEBAB recently and it was all moving well until strange things started happening with the project.
There were and still are signs of "strategic scam" everywhere but no concrete evidence to make informed decisions.
In such a case, it's ok to sell off and wait for confirmations, no matter how much you have already lost.
Over $3,000 of my profit was wiped off by the KEBAB fall but I still sold it just below my buying price of $4.99, cut my losses and waiting for confirmations.
Better to lose 50% than 99%.
Conclusion
You're rich not so much by how much money you make but how much of it you're able to keep.
And effective risk management is necessary not just to protect your capital, but also to grow and build sustainable wealth.
What are your risk management strategies? Share with us in the comments section below.
...and you will also help the author collect more tips.
I think many newbies need something like this. I tried investing but did not know how it really worked so I said I have to learn before investing again.