update 19 October 2021

How to Minimize Risks When Trading Digital Assets

The cryptocurrency revolution is moving full-steam ahead with increasingly global acceptance. For instance, India has seen its residents invest over $6.6 billion in crypto assets in May 2021. That figure is even more impressive when we discover that it grew from nearly $923 million in April 2020.

Today, trading in digital assets is no longer available only for a handful of geeky investors worldwide. Instead, many see the rise of DeFi and the increasing popularity of cryptocurrencies as a unique opportunity to gain significant returns for virtually anyone with an internet connection.

Since you can easily get substantial returns quickly, one might say that investing in crypto is more appealing than investing in gold. However, contrary to gold, the volatility of these digital assets is high. So, the possibility of failure is considerably higher than when you pay for gold.

Today, we take a closer look at the risks that come with trading in digital assets. For this to happen, we have to refresh our understanding of cryptocurrencies.

What are Cryptocurrencies?

Cryptocurrencies are digital assets that are based on blockchain technology and are decentralized in nature. They are an alternative to fiat currencies that have been in existence for centuries.

Bitcoin is the leading cryptocurrency in the market and was released in the year 2009 by Satoshi Nakamoto. It has the highest number of investors and governs the entire cryptocurrency market.

The advent of cryptocurrencies aims to replace the traditional centralization in the global monetary system. After Bitcoin came into existence, thousands of digital tokens have been introduced, and now, there is a constant supply of these digital assets into the market. 

Besides the major cryptocurrencies, the market has seen a plethora of meme tokens, such as Shiba Inu and Dogecoin, reach an unforeseen level of popularity.

The crypto industry has come a long way with the support of Tesla and its CEO Elon Musk. In addition, the recent adoption by El Salvador and Wyoming proved that the concept of digital payments using cryptocurrencies is possible and not bizarre. 

What Is Crypto Trading?

Cryptocurrency trading can be simplified as exchanging one digital asset with another or a fiat currency within the market movement. To be more precise, a crypto trader invests his money when the value of a coin is down and converts money into fiat or a stablecoin when the currency’s price is up, waiting for its downfall. 

Investing money in any crypto asset is relatively simple. The reason is that all you need to do is invest your money and wait for the digital asset to rise with time. Then, you can take out your money when you need it. It is more like investing your money in real estate. As time passes, the digital assets increase in value. 

Consider Cardano, for example; 4 years ago, its price was 0.01735 USD. So if you had invested a mere 100 dollars in Cardano back in 2017, you would be up by 117 times the initial sum, i.e., around you would be having 11,700 dollars. This is what people call “the power of holding.”

However, when it comes to trading, you don’t hold any assets. Instead, you buy and sell in a short time. In this guide, I will be sharing my secrets to crypto trading and the best ways to implement a strategy involving fewer risks.

Problems with Crypto-Traders

There are plenty of problems that are involved with cryptocurrency trading. When you start trading in cryptocurrencies, you must understand the importance of risk management. But, before we get into risk management and the strategies involved, let’s talk about the problems that come when trading digital assets.

  • Influence

The biggest problems come from third-party influences. You may see an increasing number of crypto traders boasting a lavish lifestyle on social media platforms. Such people tend to influence others into trading cryptocurrencies.

The problem is that making decisions without technical analysis or market study can create a dent in your wallet. Without a proper market analysis and fundamentals of the technology you are investing in, you won’t earn money from crypto trading. 

You should listen to what these influencers on YouTube, Instagram, and Google have to say but, it is also equally important to conduct your own study. Crypto is a very volatile asset, and trading comes with a high liability. Even a small decision can affect your portfolio in a big way.

  • Lack of knowledge

The lack of experience and knowledge is another significant risk to your portfolio. Crypto traders who are new to the market are often betting their luck in the market. This is a huge blunder that many people make.

You can definitely go ahead and put your money in a fundamentally strong currency. In the long term, we can expect every cryptocurrency to be profitable. However, those who dream about getting rich overnight are in grave danger. 

Without a proper strategy and fundamental knowledge about cryptocurrencies, you will end up hurting yourself. Many people complain about market volatility, cursing their decision to invest when the price was high and withdraw when its value hit a historically low value.

All such incidents prove the lack of experience and knowledge—several tools like Relative Strength Indicator, Moving Averages, and MCAD. You must understand the functioning of essential tools and implement them on a 15-minute or 4-hour chart.

  • Lack of practice

Almost everything requires practice to perfect. If you are getting into something without knowing the pros and cons and without sufficient experience, you will land in big trouble. 

You must understand how various indicators and tools work before you start trading in the crypto industry. You need to use all the market indicators before you choose the ones that work for you.

You also need to understand the time interval in which you will position your trade. Position sizing is a critical aspect of trading because, sometimes, the lack of correct position will hurt you in ways you haven’t imagined.

Lack of practice is like launching arrows in the dark, and you will always miss the mark. Therefore, it is always advised that you practice reading charts and position your gains and losses. There are several complex entities that you will understand once you regularly practice, and eventually, you will be able to get over these complexities. 

  • Lack of patience

Medical studies have proved that investing in digital assets has the same effect on the brain as gambling. But, this is not the case with every crypto trader. Those who lack knowledge are easily influenced by people who claim to make money in crypto overnight and always make poor decisions while investing.

The lack of patience is another attribute of a poor trader. When you place your money, you need to focus on what’s important and believe in the decision you have made. The market is very deceptive, but if your technical analysis is fundamentally strong, you will end up at the place you aimed for.

But, there is something else that you need to always keep in mind. Read on!

The Grass Is Not Always Green on the Other Side

In the crypto world, it isn’t always night, nor is it a day. There are possibilities in the crypto world that might be unaccounted for. Since cryptocurrencies are in the very beginning stage, market manipulators are always present.

These manipulators can drive the sentiment down or up depending on their strategies. However, the market is very unpredictable even for these manipulators and, it is for this situation, you should stick to your gut feeling and don’t panic. 

Technical analysis is not a fool-proof strategy. You might lose 50 percent of your trades on one day or even more. On the other hand, some traders win 60% or more of their trades daily, which is quite a good percentage.

The primary reason behind this fact is that the market is not always bullish or bearish. There is no purely bullish sentiment or purely bearish sentiment. If you look at a 4-hour chart, it is full of bullish growth with slightly bearish outcomes or vice versa. So accepting defeat and working on them is very important.  

Risk Management

Here it comes, the reason why I have written this article. First, you need to understand why and how to minimize risks while trading cryptocurrencies. While plenty of crypto traders are constantly boasting about their success in the industry, there is the fact that no one tells you about.

You are not losing money until and unless you have strong fundamentals. The reason why people with solid fundamentals lose money is due to situations that they can’t control. Before we get in too deep, let’s talk about risk!

What exactly is Risk?

Risk is any decision that you have made that would harm your portfolio, and you might end up at a loss because of that decision. 

If you visit the website of a big-asset management company, you will always find a job opening for a risk manager. This person is responsible for softening the blow when things get rough and for steering through dangerous situations. 

The companies appoint risk managers to work on minimizing their risks and damage during extreme situations. When minimizing risk, you should see the profit automatically increase in the long run.

Managing Risk

For every person in the world, any given situation involves numerous risks. Also, every person out there unconsciously minimizes the risks that come in a particularly unique circumstance. Without actually developing a strategy for risk minimization, you cannot expect substantial profits in crypto trading.

The amount of focus you place on the highest possible hazard in a trade situation delivers a directly proportionate outcome. Everyone looking to try their luck in crypto trading knows that this practice comes with significant liabilities. Nevertheless, cryptocurrency adoption is growing each day. Seasoned investors found out that it’s not all about luck but about having a solid strategy in hand.

Beginner traders usually focus on the potential gains without thinking about the risks that come with them. 

So, after putting it all together, it can be said that risk management involves looking out for the risks involved and implementing a well-thought strategy to deal with the situation and minimize losses.

Now, when it comes to risk management, four strategies work the best in most situations, such as:

  • Risk Acceptance

Risk acceptance is when you acknowledge that investing in a particular asset comes with a potential loss lower than the risk of missing out on the investment. 

Sometimes, this strategy can lead to disappointment and low confidence in your trading abilities if the risk proves to be higher than you.

  • Risk Avoidance

Let’s say you are planning to trade in a market when there is an event happening. For example, in the case of GBTC Unlocking that began on 13th July, it was rumored that the price of Bitcoin would fall below $25k. 

The biggest unlocking on 18th July brought the entire market down to its knees, but the price of Bitcoin did not fall below $27k. In such an uncertain situation, you should adopt a strategy called Risk Avoidance. 

Risk Avoidance refers to stopping trade when a particular event could influence the price of an asset negatively.

  • Risk Limitation

Risk Limitation is something that you should definitely include in your strategy during crypto trading. Risk Limitation is implemented using ‘Stop Losses.’ With a good understanding of the technical market analysis, you should implement this strategy effectively. 

The usage of “Stop Losses” needs to be understood thoroughly with the Technical Analysis of price charts. When you are looking to implement ‘Stop Losses,’ you need to look for a few things, such as:

  1. The entry price: You should figure out the entry price for any trade. After studying the charts in-depth, you need to figure out the best price for your entry position. Usually, the best entry points are support and resistance levels.
  2. You should place the ideally profitable price above its current position. If the market moves up, you will get your profit and get out of the trade. If the market continues to surge, don’t be greedy. It is always better to take your profit and get out.
  3. Conversely, you should put the stop loss at a value below its current position. This way, you may limit the damage if the market goes down.
  • Risk Transference

Another strategy that should be avoided when you are trading cryptocurrencies is Risk Transference. You should know from the start that you are the only person responsible for investing your money in cryptocurrencies, whether you win or lose. You may ask a third party, such as a brokerage firm, to trade goods for you. This way, you transfer the potential risk. Unfortunately, you most likely have to pay a fee for it. Therefore, your eventual profit will be smaller than when you trade alone.

In the long turn, this will hurt your profit by a significant margin. It is therefore not considered a good strategy for implementing during your trades. 

Other things to consider

  • The duration of trade varies. Also, one more thing you need to do is always diversify your portfolio so that if the price of one coin falls, the other coins can preserve your portfolio’s value. 
  • Also, sometimes, some coins increase manifolds as compared to others. Having a diversified portfolio will sever your ties with a loss if one coin falls beyond your expectations. You can only achieve risk minimization comfortably if you don’t put all your eggs in one basket. Simply put, don’t go all-in on one cryptocurrency only. 
  • Always have money to put in currencies that are down. If you invested in a down-trending currency, put in some more money to decrease the average. When the bulls take charge, you will be left with a decent profit.

Conclusion

It is a fact that no trader lands up a perfect trade, i.e., no trader buys or sells at the ideal time. Hence, you should expect some losses with the gains as well. If you are losing money, you also need to believe in the technology you are endorsing. 

All traders aim to make a profit. However, a trader should aim at stopping and minimizing the losses that might come from the trading hours. If you are new to this practice, you should have a patient approach towards it. 

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You should enjoy trading in digital assets and not make it a life-or-death race to gaining unforeseen riches. So keep your emotions in check and keep believing in cryptocurrencies and blockchain technology.

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