WHY IS A RISK MANAGEMENT STRATEGY IMPORTANT IN CRYPTO?

It’s common knowledge that crypto, as an asset class, is one of the higher-risk investments available to the average investor. Prices have proven to be volatile, projects can crash overnight, and the technology behind blockchain can be challenging for newcomers to understand.

With crypto moving rapidly, it’s imperative to employ sound risk management practices and strategies to reduce your exposure to potential risks. This is also an essential step to becoming a successful and responsible trader.

Read on to find out about five risk management strategies that can benefit your crypto portfolio.

The 1% rule is a simple risk management strategy that entails not risking more than 1% of your total capital on an investment or trade. If you have $10,000 to invest and want to adhere to the 1% rule, there are a few ways to do so.

One would be to purchase $10,000 worth of bitcoin (BTC) and set a stop-loss or stop-limit order to sell at $9,900. Here, you would cut your losses at 1% of your total investment capital ($100).

You could also purchase $100 of ether (ETH) without setting a stop-loss order, as you would only lose a maximum of 1% of your total capital if the price of ETH were to drop to 0. The 1% rule doesn’t affect the size of your investments but the amount you are willing to risk on an investment.

The 1% rule is especially important for crypto users due to the market’s volatility. It can be easy to get greedy, and some investors may put too much into one investment and even suffer heavy losses expecting their luck to turn.

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HAVE AN EXIT STRATEGY READY

Having an exit strategy is a simple but effective method for minimizing the risk of heavy losses. By sticking to the plan, you can take profits or cut losses at a predetermined point.

Often, it’s easy to want to keep going when making gains or to put too much faith in a cryptocurrency even when prices are falling. Getting caught up in the hype, maximalism, or a trading community can also cloud your decision-making.

One way of successfully implementing an exit strategy is to use limit orders. You can set them to automatically trigger at your limit price, whether you want to take profit or set a maximum loss.