Risk Mitigation Strategies While Investing in CryptoCurrency
Risk Mitigation Strategies While Investing in CryptoCurrency

Risk Mitigation Strategies While Investing in CryptoCurrency

By Guest post - 16 Jan 2021

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There is no doubt that investing in cryptocurrency is full of risks and a high return rate. There is yet no other asset class running almost lawless except cryptocurrency and having high potentials of return. It is said that the global blockchain market will go up to $23.3 billion by 2023.

The rules of risks attached to the trading of cryptocurrency are not very hard to follow, and if you have been a part of trading it, you will be well aware of all the risks involved in it.

The probability of risk or a negative event happening during your trading is what risk in cryptocurrency is. Risk is a part of all types of trades, but cryptocurrency has a potentially higher risk rate.

For example, if there is a 50% risk on the short position, then there will be a 50% probability rate that bitcoin’s price will rise (learn about Bitcoin’s rates on Cryptonomist), which can lead you to have a loss at your part.

Since the uprising of cryptocurrency in the last decade, it has gained a lot of attention, especially in the stock market, academic research, and financial businesses. Many practitioners are taking a lot of interest in this trading and trying to understand various aspects of cryptocurrency.

The thing about cryptocurrency that most interests the experts and practitioner are the risk mitigation strategies while investing in cryptocurrency. The risk mitigation strategies are an essential part of explaining how more than 40 billion worldwide cryptocurrency users invest in cryptocurrency while dealing with the risks that come with it.

Risk Mitigation Strategies

Cryptocurrency, just like any other trading business, is full of risks. But there are risk management strategies that can help investors in managing those risks. This is why we have collected many risk mitigation strategies to help potential investors in dealing with cryptocurrency and to avoid trading risks.

  • Position sizing

Position sizing is our first choice while discussing risk management. It means that the position sizing directives about how many coins or tokens of the cryptocurrency a party of trader will be interested in buying. 

The chances of getting greater profits in cryptocurrency trading will tempt the traders into investing almost 30% to even 100% of their capital into the trading. However, this is a very disruptive move that can seriously pose financial risks. However, the rule to save yourself in this situation is never to put all your eggs in a single basket. Always use these three smart ways to achieve position sizing.

  • Risk amount vs the entered amount

In this approach, you consider two different amounts. The first will be the money at risk, which you can lose if your trading fails. And the second will be the money which you are willing to invest in every deal.

But, before investing it is highly advisable that traders look into the order and then decide if they really want to invest money into it or not.

This is the formula for entering the amount:

A= {(Enter Price-stop loss)/ (stack size * Risk per Trade)} * entry price.

  • Elder’s shark and the piranhas

In this concept, an investor has to diversify their investments. This concept was first credited by Dr. Alex Elder, who gives two rules for this concept, which are:

  • You should limit all the positions to 2% risk only. Here Elder compares the risk to a shark’s bite. The analogy shows that sometimes an investor might be ready to risk a lot of money, but the risk would be bigger and more catastrophic; like a shark’s bite.
  • Limit the trading session to 6% per session. When you are losing a streak, you can end up spending all you have bit by bit. This is called the Piranha attack by Elder because it takes small bites of its victims until the victim is fully consumed.

These two points were discussed in an easy way in the seminar by one of the editors from Cheap Dissertation saying, “So when you follow Elder’s approach, you get results in no more than three open positions per 2% or six ones every 1%. This limits the results in reverse compounding. A loss will be smaller every time a subsequent loss happens.”

  • Kelly Criterion

This criterion was developed by John Larry Kelly in 1956. This approach is for position sizing that defines the percentage of capital used in bet. It is ideal for long-term trading.

Its formula is:

A= (success%/loss ratio at stop loss) – {(1 –success %) / profit ratio at take profit}

  • Reward and risk ratio

The reward/risk ratio involves comparing the actual risk with possible returns. While trading, the more risky a position is, the more profitable, it can be. Once an investor understands this reward/risk ratio, he can know when to enter or UN-enter a trade based on its profit or loss.

The reward/risk ratio is calculated in the following way:

 R = (Entry Price – Stop Loss)/ (Target Price – entry Price)

  • Stop loss and take profit.

Stop loss refers to a doable order which closes an open position when the price goes down to a certain barrier. However, on the other hand, taking profit is an executable order that helps liquidate the open orders when the prices rise to a specific level.

Both of these approaches are good while managing cryptocurrency risks. The stop-loss approach will save you from trading in unprofitable deals while taking profit will help you get out of the trade before the market turns against your trade.

You can take help from terminals like Superorder to set your trailing stop losses and take profits.

  • Accept failures

Risk is a part of all kinds of trading, trading is basically another name for risk. You can never approach trading in a way that is clean of risk. Therefore you can’t eliminate the element of risk. So, the best thing you can do is accept your losses, learn from them, and move forward. Furthermore, you should rely on plans to make your trading decisions so that the risk factor might get a bit minimized if not eliminated altogether.

  • Consider the fees and concentrate on the winning rate

If you are fairly new at this cryptocurrency trading game, then you need to take into account all the fees which will be required in this trading. There are many types of fees that incur like leverage fees, withdrawal fees, management fees, etc. Keeping these fees in mind can help in managing risks.

Risks can discourage you from trading in cryptocurrency. However, you should remember the times you have won to keep your morale up. If you are new to this, then talk to a few people who have been in this business for a few years to get some hope.

  • Measure drawdown

This strategy refers to reducing your initial funds from the total funds after a set of losses. For example, if you lost $2,000 from $6,000, your measure drawdown will be 10%. But, if the loss rate is higher, you will need to inject more into your trade to recover from the loss.

This is where you need to follow Elder’s advice of sticking with only a 6% risk limit.

If you’re someone who is interested in investing in cryptocurrency and who has been planning to do so for some time, then we really hope that you find our risk mitigation strategies helpful in the long run.

Author bio

Gloria Kopp is currently working as a Business Manager at EssaysnAssignments and Ace Assignments where students ask to write my dissertation cheap. She has done great work in helping out people, and she has also shaped many lives with this notion. Apart from this, she also owns an online service where she aids people –especially students with their academic works.

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