The total market capitalization of cryptocurrencies rose from $193 billion in January 2020 to $641 billion in December 2020. In 2020, the industry would have expanded by more than three times its current size. In a year, popular digital assets such as Bitcoin have increased by 300 percent, while Ethereum has grown by 450 percent.
The crypto industry as a whole has seen institutional and retail traders become more interested in the market. The number of institutional clients on major cryptocurrency exchanges increased by 46%. Around the same time, the number of addresses carrying 0.01 Bitcoin grew by over 700,000, suggesting a spike in retail crypto traders.
Although the industry is gaining momentum at a rapid pace, cryptocurrency trading is not without its dangers.
Cryptocurrency Trading Risk
Any investment in the financial markets entails some level of risk. Assessing threats and designing plans or responses may help to minimize them and avoid losses. The following are a few examples of risks associated with cryptocurrency trading:
Market Risk
Market risks lead to the possibility of the price of digital assets fluctuating upwards or downwards due to a number of factors. It's possible that the market would shift in the opposite direction of your open spot.
Liquidity Risk
It refers to when traders are unable to convert their digital assets due to low liquidity or market cap, which is accompanied by trading in low-volume markets.
Credit Risk
Thefts and fraud are two threats that come with a cryptocurrency project. A crypto project could fail if the founders are unable to fulfill their obligations, engage in unethical conduct, and so on.
Operational Risks
When traders are unable to remove their crypto tokens from a specific business or project, this is known as an operational failure.
Systematic Risks
These risks lead to the collapse of the crypto industry as a whole, or any other financial market, as a result of global events that cause consumers to lose faith in the system.
Risk-Reduction Techniques for Cryptocurrency Trading
Trading or investing in any market necessitates a trader's strategic action in order to reduce the amount of money lost. Some of the strategies that an investor may use when investing in crypto markets are mentioned below.
Position Trading
One of the risk control techniques used in cryptocurrency trading is position sizing. Traders who spend a large percentage of their money without a trading strategy risk suffering significant losses in the event of a market crash. Some coins' prices were slashed by up to 90% during the 2018 crypto market crash.
Place sizing helps you to build a trading strategy based on factors such as diversification of assets through several coins, setting stop-loss limits, and the percentage of risk you're willing to take in each trade, among others. Position sizing aids in determining how much you're willing to lose and, as a result, developing a strategy to keep the losses within the target range.
Risk/Reward Ratio
The risk/reward ratio (R/R) is a formula for determining how much risk a trader is willing to take in exchange for future rewards. In layman's words, it aids in the evaluation of future rewards for each dollar invested.
The risk/reward ratio is calculated by dividing the overall risk by the net goal benefit. For a particular trade, you must set a stop loss and take benefit goal. For example, suppose you buy 1 BTC with the intention of profiting 10% on the trade. To keep your losses to a minimum, you've set a stop loss of 5%. Your R/R ratio is 5/10 = 1:2 in this case. As a result, for every dollar you risk, your future profits are multiplied. If the R/R ratio is high, the trade should be reconsidered.
Stop Loss and Take Profit
Stop Loss and Take Benefit are two separate methods for minimizing losses and locking in profits. Stop loss applies to when a deal is automatically closed if the price of an asset falls below a certain amount. When the price of an asset increases to a certain amount, the trade is automatically liquidated.
These techniques will help you remove the emotional component from a trade. It also makes it easier to get out of a trade before the market turns against you.
Diversify Investment
It is always a good idea to diversify your assets and not place all your eggs in one basket, just as it is with every other financial industry. A diversified crypto portfolio is one that invests in a variety of digital currency tokens in order to reduce the chance of one or more failing to perform.
Traders use a number of techniques for diversifying their portfolios. Diversifying based on industrial use-cases, solutions, and other factors, as well as assigning a percentage to safe and risky properties.
Conclusion
It is always a good idea to diversify your assets and not place all your eggs in one basket, just as it is with every other financial industry. A diversified crypto portfolio is one that invests in a variety of digital currency tokens in order to reduce the chance of one or more failing to perform.
Traders use a number of techniques for diversifying their portfolios. Diversifying based on industrial use-cases, solutions, and other factors, as well as assigning a percentage to safe and risky properties.
What do you think the best coins to hold eight now?