There are currently around 1 billion people worldwide that use cryptocurrencies.
Since Bitcoin was invented in 2009, the popularity of cryptocurrencies has exploded. Many have made huge profits by investing in crypto – but many have also made losses. One of the reasons people often lose money is that they don’t take investing risks into account.
For a guide on how to minimize your exposure when investing in crypto, keep reading.
What Is Risk?
Risk is something that comes with any kind of investing, be it crypto, stocks, bonds, or any other assets. It’s the potential to lose money, which typically happens when you expect an asset to perform in a certain way, and it does the opposite. Some assets are generally riskier than others, and crypto is known to be very high-risk.
What Crypto Investing Risks Do You Need to Know About?
There are various crypto investing risks to be aware of. Some are quite easy to mitigate, while others are far more difficult.
Volatility
Of the many crypto risks, this is perhaps the most well-known. Prices can change quickly, resulting in significant gains or losses. This happens in other markets, but it’s far more significant with crypto than with things like stocks.
Unclear Valuation
Stocks can be easy to value as investors can look at business operations and see the results. Things like earnings, cash flows, sales, and more help people place a value on specific stocks.
This is far more difficult with crypto. While some coins have real-world uses, they’re minimal, and it’s hard to say what will happen in the long term. As such, it’s hard to know exactly what a coin should be worth now, and even more so in the future.
Hacking
Blockchains themselves are very secure, but there are other ways that malicious parties could steal your crypto. This can happen through crypto exchanges where many people hold their funds, and even external wallets if people click a scam link or interact with an unsafe asset.
Lack of Regulations
Crypto is still quite new, so governments are still working on regulations. Different countries are taking different approaches, and we’re still a long way from global regulation.
Without regulation, many investors are hesitant to enter the world of crypto. This is more true of institutional investors than retail investors.
Decentralization
Decentralization is one of the most important elements of cryptocurrencies, with most investors favoring it. There are, however, potential issues with it. For example, malicious groups could infiltrate a community and slowly take control, allowing them to influence decisions.
Lost Crypto Wallet Keys
Any crypto you invest in will be stored in a wallet. This could be on an exchange, a soft wallet, or a hard wallet. If you lose access to your wallet, you’ll never be able to get the crypto back.
Cryptocurrency Risk Management Strategies
One of the smartest things you can do as an investor is to focus on reducing crypto risk. This will help minimize losses when things go wrong, and unfortunately, that will sometimes happen. These are some strategies to help with crypto risk management.
Invest Buffer Money
A popular rule amongst crypto investors is “only invest what you can afford to lose”. This is because there’s always a possibility that you will.
You shouldn’t invest any money that you require to cover basic needs and living expenses, nor should you take a loan to invest in crypto. A popular strategy is to invest small amounts regularly, such as 10% of your earnings a week. This will help you build your portfolio without needing to invest a large sum at one time.
Diversify Your Portfolio
All of the best investors maintain a diverse portfolio to help protect themselves from volatility. If you only own one cryptocurrency, and the value drops suddenly, you could lose a lot of money.
By splitting your funds up between several cryptos, one can drop, but you won’t take a huge loss while the others hold stable. This also applies to types of assets – by holding crypto, stocks, property, etc., a crash in one market may not be too much of an issue for you.
Cold Storage
You should keep your crypto secure to stop hackers from stealing it. Soft wallets are more secure than exchanges and are typically free to use. They operate as browser extensions or smartphone apps, giving you control of your crypto.
Cold storage (also known as hard wallets) are physical devices that you can use to store your crypto. They’re the safest way to hold crypto, but you’ll need to buy one first.
With both soft and hard wallets, you’ll have a 12-24 word recovery phrase so that you can recover your crypto if you lose access to your wallet. Note that if you lose this recovery phrase you may lose your crypto forever. Ensure you write it down (not on a computer/phone so hackers can’t steal it) and keep it somewhere safe.
Investing in Companies With Crypto Holdings
It’s reasonable to be a bit hesitant when it comes to investing in crypto. Something you can do for a bit more peace of mind is to invest in a company that has crypto holdings. You can look at a company’s balance sheet to see how much crypto they own, which will help you determine a suitable company to invest in.
Reduce Investing Risks
There are a lot of elements to consider when investing in cryptocurrencies. One of the most crucial is minimizing investing risks to ensure you don’t suffer significant losses.
Foundation for Digital Asset Risk is here to educate people on the risks of investing in crypto. As such, we can help you keep your risk to a minimum. To find out more about how we can help you, click here to contact us today.