Necessities of Crypto Investments with Risk Management in The Volatile Market
As time progressed, crypto markets have been more closely linked with the global economy and have been affected by economic forces
Crypto assets are evolving in an unprecedented manner. With fast Innovation new words keep getting added in the crypto glossary seemingly every week.
Crypto assets emerged as a decentralized alternative to fiat currencies. Although they were mostly used for transactions, their values began to fluctuate based on market demands, similar to the traditional financial market. As time progressed, crypto markets have been more closely linked with the global economy and have been affected by economic forces.
Why is Crypto in your Portfolio a necessity?
Most Crypto Investors invest in cryptos having 58% stocks, 37% Debt, and 5% Bitcoins, instead of 60/40 stocks and debt. The Ratio can vary substantially with varying risk appetite.
Just 5% of Bitcoins added to your portfolio may be enough to shield you from devaluation. However, this is not investment advice but a way to put things in perspective.
Bitcoin and many other crypto assets are scarce. When the stock market falls or rises, the price of cryptocurrencies remains largely unaffected by it and are usually negatively correlated. Thus, making them an excellent tool for portfolio diversification alongside commodities.
Investing in Cryptos? Don’t forget to manage your risks.
The Crypto trading community is exposed to various financial risks if left unmanaged. Managing risk in Crypto is almost similar to managing any tradable instrument in the market along with some variations
Risk to reward
Risk reward ratio = (Target price – Entry price)/(Entry price – stop loss)
A good setup for crypto trades usually contains a decent risk-reward ratio, and the rewards are worth the wait. Ignore the trades where the risk-reward ratio is less than 1:1 as this may result in capital erosion in due course of time. Even with a higher losing streak you may make a profit.
Capital Allocation
Right capital allocation is necessary for risk management in crypto trading. Markets are continuously in motion and the market environment is constantly changing. Allocating capital on the right project and assets is necessary rather than keeping hope on a stanganat project hoping it will miraculously bounce back.
Position Sizing
Investors should not deposit a large part of their trading capital in crypto trading thinking of making huge returns. Never put all your eggs in one basket. This is a risky strategy that puts your finances in jeopardy.
Trading on Multiple Time Frames
Multiple time frame research helps avoid tunnel vision because it’s all too easy to get caught up in a single time frame and miss the bigger picture of the market trend. Higher the time frame the lower the noise will be.
Stop Loss and Trailing
It is always advised to put a stop-loss order for your every trade. It is the most important aspect of risk management since it allows the trader to limit the risks of unexpected turns of events which have been part of the envisioned trade plan.
Portfolio Setup
Investors can further allocate funds in a planned way where they can decide how to diversify their crypto holdings to maximise returns. The following sample is purely indicative and does not qualify as investment advice.
- 30% BTC (Long Term HODL)
- 20% BTC (Take Profit at High)
- 15% Fiat / Stable Coins (Reserved for buying the dip)
- 20% Large – Mid market cap alt coins
- 15% Defi/NFTs
Before jumping into investing, it is imperative to understand that crypto investing does not have the same regulatory protections stock investors are familiar with. Crypto investing is highly risky and volatile. Given all of this, beginners in the industry must take precautions to protect their hard-earned capital.
(The article is written by Manoj Dalmia, Founder & Director, Proassetz exchange, views are his own)