Everyone is exposed to some type of risk every day—whether it’s driving, running business, traveling, working, investing, or performing some one activity or the other. Investment comes with considerable risks, with varying degrees depending on the nature of investments or and how much of the skin you have in the game. In crypto investment, the risks become even more considerable, given the volatility of crypto assets. So before making that crypto investment decision, it’s vital that you understand risks and risk management.
Risk, according to ISO 31000, means the “effect of uncertainty on objectives”. This definition—as simple as it is—covers any type of risk in any organization or industry. When we do not know the implications of an event, whether actual or hypothetical for one of our objectives, then we are on the hunt for a risk. The higher the level of uncertainty about the outcome of the steps that you take, the higher the probability that the effect will be negative, and vice versa. Being able to clearly measure the effect of uncertainty on objectives helps us to manage the outcome.
All investments involve some degree of risk. In the area of investment, risk refers to the degree of uncertainty or potential financial loss inherent in an investment decision. For example, if you buy bitcoin today at $38,000, what’s the degree of potential loss you can face for making such a decision? That’s risk.
Risk management in the context of investment, on the other hand, is the process of identifying, assessing, and controlling threats to one’s capital and earnings. According to Dr David Hillson, risk management entails asking and answering six basic questions. They include:
- What am I trying to achieve?
- What might affect me?
- Which of those things that might affect me are most important?
- What should I do about it?
- Did it work?
- What changed?
When we build our risk process around the six questions above, risk management becomes easy (or at least less difficult) to do.
Managing risks is not all about avoiding risks. We manage risks so that we can actually know which risks are worth taking, which ones will get us to our goal, and which ones have enough returns that are worth taking them. Also, the term ‘risk’ does not always suggest negativity. There are good risks and there are bad risks. It is after measuring the effect an uncertainty would have on our investment objectives that we can decide whether to take or avoid a particular risk.
There’s already so much discussion out there about avoiding bad risks but here’s a call to taking good risks when investing in crypto assets.
5 vital tips on risks management in the crypto market
Cryptocurrency investments are generally termed speculative investments. This is understood to mean that investing in cryptocurrencies or cryptoassets involves a high degree of risk because profiting on price fluctuations is the goal, whether in the short term or long term. Prices of the most popular currencies can be very volatile. The crypto investor speculates by buying a cryptocurrency or cryptoasset at a particular price in an attempt to profit from price volatility. Because cryptocurrencies or cryptoassets are highly volatile, the returns on investments could be quite significant, if the price shoots up. But should the price nosedive, you may use your life jacket. And before jumping off, please ensure that the coast is clear.
Not investment advice, below are 5 general tips that can help you maximize profits and minimize losses in the crypto market:
- Conduct proper research:
Before investing in any cryptocurrency, be sure to do proper research about the project. Study the market, filter the noise and hypes that often permeate the crypto space, and invest in projects with good fundamentals. To determine whether a project has good fundamentals, some of the major things to consider are the strength of the use case(s) of the project, credibility of the founders/developers of the project or team, tokenomics of the project, and the roadmap of the project
- Determine your reward/risk ratio:
Reward–risk ratio is how much you stand to profit from every unit of currency you risk. Invest only what you are ready to risk at any given point in time. Logically, the higher the reward you have set as a goal, the higher risk you must take, and vice versa. So while you have your eyes on the reward, don’t keep your eyes off the ball.
- Don’t go all in:
Going all in may make you end up buried deep if the coin invested in dips. It is too risky. This is why investing in different coins can help you to minimize the risk factors. A diversified portfolio minimizes the risk associated with the portfolio. Some coins could be extremely volatile while others may be relatively less volatile. Some coins, historically, have more sustainable demand than others. Sharp demands that suddenly shoot up prices are generally suspect as they are in most cases not sustainable. If you didn’t see it coming, it will hurt you. Badly.
- Define your entry-exit strategies:
Your entries and exits are an essential part of your crypto trades. Planning your exit points is a crucial part of a solid risk management strategy. Plan when to sell or take profit. For leveraged positions, always set your take profit and stop loss. Don’t be greedy. And don’t be emotional. Never get too confident. Don’t get carried away. To effectively manage your risks, stick with your strategy. While it is good to be flexible sometimes, indecisiveness or not having a strategy is not flexibility.
- Save in USDT for DCA (Dollar Cost Averaging): Dollar Cost Averaging (DCA) is an investment strategy that involves spreading purchases across predefined intervals. DCA is vital because if you always have savings in USDT, you will be able to secure some coins at discounted price whenever there’s a market crash.
Remember, with crypto investments, no one knows for sure—not even Satoshi Nakamato. If you decide to invest, invest responsibly.