Jul 20, 2020 12:24 PM EDT
How to Manage Risk While Dealing In Cryptocurrencies
Due to high volatility, the crypto market has attracted many people. In the past few years, the crypto market has become one of the main sources of income for many traders. Despite the fact that some traders and investors have earned a huge profit from the market, still many people are losing away their money.
In fact, most people don't know how to handle risk while dealing with cryptos. Even some people don't understand the crypto market properly and make a loss. Being aware of the potential risks of the crypto market can help the traders to manage risk. In this article, I am going to help and guide you to manage risk in the crypto market.
Before that, it is important to understand what is diversification of investment portfolios and why it is important.
Understanding the Risk in Crypto Market
Well, diversification can't completely eliminate risk but it can help to manage risk. But keep in mind that there are two types of risks such as systematic and unsystematic risk.
The systematic risk is also known as the market risk which can't be diversified. Because it can't be reduced or eliminated as it includes exchange rates, uncertainties like war, natural calamity, inflation rate, etc. This risk is present in every industry and company, so the investors need to accept this type of risk.
Unsystematic risk includes business risk and financial risk which can be diversified. These risks vary from company to company so you can analyze those things. Now let us understand the importance of diversification and why you should do that.
Let us understand the importance of diversification with a simple example. Assume that you have invested in a particular instrument and you get to know from the news that the company is going to face a decline due to some business risk. Now, in this case, you can reduce the amount and invest in another company within the same industry. This will help you to potentially reduce your risk and increase your chances of success.
What is Risk Management?
The ultimate goal of every investor is to minimize risk and increase return. Investment portfolio diversification is a technique to reduce risk by investing in different types of financial instruments and other investment options.
This helps to maximize the return by managing the risk; however, it does not guarantee that you will never lose. The idea is to obtain long-term gains by managing the current risk through diversification. Now let us know different types of investment risks and how diversification helps to manage risk and increase profit.
Tips to Manage Risk
Here are some tips to manage risk while dealing with the crypto market.
First, the underlying technology provides a secure platform that is immutable, unhackable, and traceable.
Even there are many illegal activities that occurred in the past because people were unaware of this field at that time. Today, people are much careful about fraudsters and cybercriminals.
Decentralization is one of the main reason which allows money exchange without any central authority. As centralization has a lot of issues such as complex money transfer process, slow processing, intermediary charges, etc. All of these things can be eliminated through decentralization and the future potential of cryptocurrency is bright.
The cryptocurrencies are independent, especially bitcoin. As bitcoin is directly connected to any government, banks, or financial market so it is independent. That's why it is suitable for diversification.
That's why people diversify their investment in different types of assets. In recent years, people are looking at cryptocurrencies as a viable investment option. Now read the bitcoin revolution to know how these tips help many traders to gain long term profits.
Finally, keep in mind that emotional control and self-discipline are the most important thing while trading. Again, the crypto market is more volatile, so you will tend to take an emotional decision in greed. So be very careful and never take any impulsive trade, trust your strategy, and stick to your plan. No matter how much you gain, always stay on the ground. I hope you have understood how to manage risk in the crypto market. Please don't forget to share your take from this article.
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