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Best Strategies to Reduce and Manage Risks When Trading Crypto

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By Augustine Mbam - - 5 Mins Read
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A person's hand tuning a meter labeled as 'risk'



The principal aim of all traders in the crypto market is to pocket some profits. However, this simple aim can only be achieved when a carefully implemented plan is utilized. Since cryptocurrencies are unarguably volatile, it's possible that you can lose a fortune in a day or make a fortune in a day — literally. 


Cryptocurrencies are known to be highly volatile, making them a risky asset class to trade. Despite this, there are ways that traders can reduce their risk exposure. You don't want to end up like this trader who lost over $430,000 and got liquidated 14 times in just one day!


This article outlines some straightforward strategies for managing crypto risk and avoiding losses. If you also trade leverage or futures in crypto, there are some helpful trading rules for futures traders that you'll find insightful.


  • Dollar Cost Averaging (DCA) 

Dollar-cost averaging is one of the most underrated crypto risk management strategies. The good thing about this strategy is that both beginners and experts in the crypto industry will benefit from using this strategy. It entails investing your crypto funds bit by bit instead of splurging everything in one go. 


Let's say you have $10,000 to invest in cryptocurrencies. Instead of investing everything at once, you could consider investing $1,000 monthly for 10 months. This approach can help minimize potential losses and is worth considering.


  • Invest What You Can Afford to Lose 

Even the most knowledgeable crypto experts advise newbies to only invest what they can afford to lose. The crypto market is highly volatile, and it's not wise to borrow or invest money you can't afford to lose. The market is unpredictable, and even the best technical analysis can't predict sudden bearish trends that can wipe out all your investments in a single wave.


As a trader, it's crucial to invest only the amount that you can afford to lose. There have been instances where poor investments have led to the closure of several cryptocurrency companies. For example, in 2021, a crypto trading platform named Torque faced losses due to unauthorized trading by one of its employees, leading to its closure.


  • Diversify Your Portfolio 

One of the best things you can do as a trader looking to minimize the risks of trading is to spread your investment assets instead of focusing on one cryptocurrency. Distributing funds across multiple investments is a core crypto risk management practice. The reason here could still be traced to the volatility of the crypto market. Investing all your funds in one cryptocurrency that is not as stablecoin will come off as one of the worst moves. 


In the event of a bearish trend in the market, the impact on various cryptocurrencies can differ. It's important to note that some cryptocurrencies can maintain a bullish stance even during a bear market. Therefore, investing all your funds in one token can result in either significant profit or loss. In the volatile crypto market, the probability of making a loss is higher than that of making a profit. As an alternative, instead of investing the entire $10,000 in Ethereum, it is advisable to diversify by investing in different tokens such as Bitcoin, XRP, Hedera, BNB, and other assets.


  • Apply Caution While Trading 

The worst thing even the most expert trader can do while trading in the market is to assume they know everything. A constant crypto risk assessment process is to check if you are not overly confident about trading in the market. 


Staying aware of overconfidence when dealing with the crypto market is very vital. Always bear in mind that anything can happen, and you should prepare for any possible outcome. As an investor, you may need to exit a trade after reaching a certain profit level, rather than waiting for further gains. This approach can help you avoid potential mistakes and losses in the market. 


  • Keep Unused Assets in Cold Wallets 

As a continuous crypto risk assessment, one of the things you should constantly check out for is leaving your inactive funds in a crypto exchange. It doesn't matter if it is a decentralized or centralized exchange. Multiple things can happen in a crypto exchange that might seem too fast for you to comprehend. Ask the victims of FTX. After discovering the crypto exchange's bankruptcy, they were left dumbfounded on the next step. 


Multiple things can happen to a crypto exchange at the same time. One is that crypto exchanges are very susceptible to cyber attacks, and you might lose your money when these cybercriminals strike. The best recommendation is to move any funds you aren't using to a cold wallet. A cold wallet is a type of crypto wallet disconnected from the internet. Hence making it extremely hard for cybercriminals to hack it. Still, you should be careful with your private keys.