How to Minimize Risks When Trading Digital Assets

Iulian Lesanu

@Iulian

BitcoinCrypto Trading

The cryptocurrency revolution is moving full-steam ahead with increasingly global acceptance. For instance, India has seen its residents invest over $191.7 tonnes of gold in Q3 2022. That’s $11.8B worth of gold! That figure is even more impressive when it grew from nearly $923 million in April 2020.

Today, trading in digital assets is no longer available only to 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, 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 look closely at the risks of digital trading assets. But, for this to happen, we must refresh our understanding of cryptocurrencies.

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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 existed for centuries.

Bitcoin is the leading cryptocurrency in the market and was released in 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 were introduced, and now, there is a constant supply of these digital assets in 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 digital payments using cryptocurrencies are 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. 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, 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 11,700 dollars. This is what people call “the power of holding.”

However, you don’t hold any assets wending it comes to tra. Instead, you buy and sell in a short time. In this guide, I will share 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 when trading digital assets.

Influence

The biggest problems come from third-party influences. You may see increasing 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. On the other hand, with a proper market analysis and fundamentals of the technology you invest in, you will earn money from crypto trading. 

It would be best to listen to what these influencers on YouTube, Instagram, and Google have to say, but it is equally important to conduct your study. Crypto is very volatile, 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 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. 

You will avoid hurting yourself with a proper strategy and fundamental knowledge about cryptocurrencies. 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. You’ll need to know the pros and cons and with enough experience to avoid getting into big trouble. 

Before starting trading in the crypto industry, you must understand how various indicators and tools work. It would be best if you used all the market indicators before you chose the ones that work for you.

I also want to point out the time interval you will be able to position your trade. Position sizing is a critical aspect of trading because, sometimes, the lack of a correct position will hurt you in ways you haven’t imagined.

Lack of practice is like launching arrows in the dark; you will always miss the mark. Therefore, it is always advised to practice reading charts and position your gains and losses, if you don’t mind. There are several complex entities that you will understand once you regularly practice, and eventually, you can 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 only the case with some crypto traders. Those who need more knowledge are easily influenced by people who claim to make money in crypto overnight and always make poor decisions while investing.

The need for more patience is another attribute of a poor trader. When you place your money, you need to focus on what’s important and believe in your decision. 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. For example, you might lose 50 percent of your trades in 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 is that the market is sometimes 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’ll 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 it.

You are losing money once and if 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 you have made that would harm your portfolio, and you might end up at a loss. 

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. 

Companies appoint risk managers to minimize 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, everyone unconsciously minimizes the risks in a particularly unique circumstance. Therefore, you need to develop a strategy for risk minimization to 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 about more than 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, risk management involves looking out for the risks 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 acknowledges 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 is higher than yours.

Risk Avoidance

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

The biggest unlocking on the 18th of 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 risk avoidance strategy. 

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

Risk Limitation

You should include risk limitations in your strategy during crypto trading. Risk Limitation is implemented using ‘Stop Losses.’ It would be best if you implemented this strategy effectively with a good understanding of the technical market analysis. 

The “Stop Losses” usage 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 looking through the charts in-depth, you’ll need to figure out the best price for your entry-level position. Usually, the best entry points are support and resistance levels.
2. It would be best if you placed the ideally profitable price above its current position. Then, if the market moves up, you will get your profit and get out of the trade. However, if the market continues to surge, don’t be greedy. It is always better to take your profit and get out.
3. Conversely, it would be best to 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. So, it is 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 if you don’t put all your eggs in one basket. Simply put, go all-in on more than one cryptocurrency. 
• Always have money to put in currencies that are down. If you invested in a down-trending currency, put in more money to decrease the average. Then, you will be left with a decent profit when the bulls take charge.

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Conclusion

It is a fact that no trader lands 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 must believe in the technology you endorse. 

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

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It would be best if you enjoyed trading in digital assets and did not make it a life-or-death race to gain unforeseen riches. So keep your emotions in check and believe in cryptocurrencies and blockchain technology.