Crypto is a volatile investment – that much is plain to anyone who’s spent some time in the market. Luckily, there are some strategies that can help to mitigate that risk and protect a portfolio from the ups and downs as much as possible. This guide will cover a few risk management strategies that crypto investors use to reduce risk and make the crypto market seem like less of a roller coaster.
Avoid FOMO, Practice DCA
It’s important to remember that crypto doesn’t go up endlessly and that sometimes there will be sharp pullbacks in value. Some mitigate this by practicing dollar-cost averaging (DCA), meaning a strategy of buying a set amount of crypto every week or month. For example, there’s an investor who has $1000. Instead of investing it all at once, they spend $100 every month for 10 months. Doing so allows them more significant buys when prices are lower and smaller buys when prices are higher, which helps to mitigate the risk of buying at the top only to go careening off a price cliff.
HODL
“Time in the market beats timing the market.” Panic selling is never a good thing, as it can lead to selling at a loss. Likewise, panic buying can lead to dumping large amounts of money into a token that craters in value the next day. HODLing is not a magic cure for risk or loss. Instead, it can be a good strategy for achieving a specific amount of profit or exit point, while avoiding rash decisions that can lead to major losses.
Take Profit and Rebalance
Most investors are in crypto to make a profit, and there’s nothing wrong with that. But it’s important for an investor to take that profit at different intervals to ensure those gains are locked in. One way an investor may do this is by setting certain percentages at which to sell some crypto. For example, there’s an investor who has some SOL and it jumps in value by 25%. In order to take profits, they sell 5% of their SOL holdings. The next month, SOL falls by 15%, but because the investor took profits, the overall value of their portfolio is worth more than someone who held on to all of their SOL. This is where rebalancing works hand-in-hand with taking profits. In crypto, BTC often dictates what the rest of the market does. Moving those profits into a stablecoin, like USDT or USDC, helps to insulate a portfolio from any large movements in price action. Those profits can also be reinvested when market conditions are favourable for buying the dip. It’s important to set exit points at which to take profits so that those hard-earned gains are realized.
All of the Above
Many investors mix two or more risk management strategies. There’s always going to be risk associated with investing in speculative assets, but the lows and highs of the crypto market don’t have to be as bad with risk management.
