Did you know that as late as 2017, you could still buy an entire bitcoin for less than $1,000? In 2021, the value of this cryptocurrency would reach its peak value of more than $60,000 per coin. Even since the more recent cryptocurrency crash, a single bitcoin is still worth close to $30,000.
There is no denying how much money many people have made out of investing in crypto. At the same time, some people are more interested in investing in crypto without risk these days.
The bad news is that no investment of any kind is possible without some kind of risk. The good news is that there is a lot that you can do to help cut down on your investment risks, including in the crypto investment space.
But if you have heard about investing in crypto without risk, you might wonder if it is really as impossible as all that. Read on to learn all about the top things to understand about crypto investment risks and what you can do to minimize them!
Can You Eliminate Crypto Investing Risks?
For a while, it was popular for people in the crypto investment space to speak with great confidence about the security of their investments. After all, years had gone by and almost anyone who invested in crypto had seen an enormous profit. Many people have become millionaires or even billionaires by dumping their money into crypto and then waiting only a few years.
On top of that, the crypto industry was becoming much more established and had better protections. Major institutions like banks and grocery stores were starting to accept cryptocurrency. People walking around large cities started to see crypto ATMs show up.
Plus, even nations like El Salvador declared that they would accept certain cryptocurrencies as legal tender.
All of this seemed to point to a world in which investing in crypto was a great idea. People who showed more hesitation or followed traditional investment advice tended to make much less off of their investments than people who went all in on crypto. On the other hand, all of this looks a little bit different a few years later on.
We have seen a number of ways that the crypto industry is not immune to standard investment wisdom. For example, many people focused only on the demand for cryptocurrencies when they thought about potential risks and rewards. Most people were completely caught off guard when one of the largest crypto investing platforms in the world, FTX, turned out to be engaging in alleged fraud.
Plus, the latest crypto market crash means that there are now a much more even number of people who have lost money through crypto investment as well as gained from it. In the end, the story seems to be that it is impossible to eliminate all risks from crypto investing.
Common Risks in Crypto Investing
There are a few different reasons why it is impossible to eliminate all crypto investment risks. For one thing, it is important to appreciate that the value of cryptocurrencies is based only on demand for them. Although traditional currencies also derive their value from demand, they also base their value on their use as legal tender.
In other words, governments have promised to accept their own currency as payment for debts. That provides them with a certain amount of value independent of how much demand there is for them.
This lack of grounding for cryptocurrencies makes them much more susceptible to huge swings in pricing. Those huge swings up were responsible for a lot of the excitement about crypto investment. However, the huge swings down that we have seen since then have tempered a lot of people’s interest in crypto investment.
Another reason that crypto investing can be risky is that there is much less regulation when it comes to crypto investment. By its very nature, it is much more difficult for governments to regulate and control cryptocurrencies. On top of that, even if governments have the ability to regulate crypto companies and platforms, they may not yet have gotten around to doing so.
Even the most established crypto platforms could potentially pull the rug out from their users at any time.
Another big risk in the crypto investment space is taking care of your crypto wallet. Many people did not realize how much they depended on bank security and government regulations to keep their money safe. Once people started keeping huge amounts of money in their crypto wallets, they began to fall prey to scammers and criminals.
Making significant investments in the crypto space requires that you learn how to use crypto wallets as safely as possible as well.
Lower Risk With Portfolio Diversification
Although you cannot get rid of all crypto investment risk, you can do a lot to reduce it. One of the best ways to do this is by following standard investment advice.
There may be short amounts of time in which investment wisdom seems untrue. However, it has always proven itself in the long run. For example, if you want to lower your crypto investment risk, you might want to focus on portfolio diversification.
That way, if any one of your investments fails, the rest of your wealth will be protected. However, some people think that this means investing in several different crypto coins. The truth is that for true diversification you will need to invest outside of the crypto industry as well as within it.
That way, even if the whole crypto industry takes a huge dive, your investments elsewhere will help you cut your losses.
Learn From the FTX Failure Incident
In the world of crypto investment, it is important not to take things for granted. It is easy to have a simple analysis that says that if demand goes up in such a way, your investments will definitely increase in value.
Within that context, this analysis might even seem certain and safe. However, something outside of that analysis, like the fraud of a large crypto investing platform, can always ruin your calculations.
The longer crypto is around, the more we will discover the potential pitfalls that come with it. With enough years and decades of experience, we will be ready to eliminate many of the risks that investors face in crypto investment.
This is the same way that many of our most secure institutions became safe to depend on over time. Until crypto has been around longer, it is important to always have an eye out for potential unforeseen risks that you might not be thinking about.
Use Stop Loss Orders for Crypto Risk Management
A lot of people lost much more money than necessary in crypto investment because they failed to use stop loss orders. Stop loss orders allow you to indicate in advance when you would like to sell your investments. In other words, if your investment tanks, a stop loss order can help you sell it after it has lost only 15% of its value instead of when it has lost more than 50% of its value.
Some people feel overconfident that they know that the market will never suffer from this kind of sudden drop. However, a lot of people have lost money by ignoring this powerful risk management tool.
Test Your Cryptocurrency Risk Management
It is often a good idea to make virtual crypto investments before you make real ones. By making play investments, you can see how they would have played out if you had made them with real money. This kind of exercise can help you confront how reliable your investment intuitions are or are not.
Make Sure to Size Your Positions
No matter how brilliant the investor is, it is inevitable that people will sometimes miscalculate. If you are right about whether or not a trade will be profitable 90% of the time, you can make an incredible amount of money. However, if you invest all of your money in every trade, even this incredible rate of success will not save you from the 10% of times in which you lose everything.
Many trading experts say that you should not put more than 1% of your total investment money at risk in a given trade. In the long run, it is much safer to make smaller trades.
Understand the Viability of Crypto Without Risk
Since the cryptocurrency market suffered its latest crash, more people have been concerned about crypto risks than ever before. That has also led to an increase in interest in the idea of investing in crypto without risk. Although it is impossible to eliminate all risks, there is no denying that there are powerful tactics that can help you minimize your crypto investment risks.
To learn more about how you can find the best crypto risk management help for your situation, reach out and get in touch with us here at any time!