It all started with Bitcoin, and since then, cryptocurrency has grown in popularity exponentially. There are over 20,000 different cryptocurrencies today, and as exciting as they are, they also carry risks. If you’re an investor interested in the crypto space, then you need to understand these risks and how to effectively manage them.
Cryptocurrency Risks
By their nature, cryptocurrencies can be extremely volatile. Prices can fluctuate wildly within short periods, and both broader economic conditions and market sentiment are key factors as to why. This market risk is not something that you can ignore.
Liquidity risk is another important concern. While it’s easy to buy cryptocurrencies, you can sometimes face difficulties when trying to convert them back into fiat currency. This could be as a result of traditional financial institutions having limited acceptance of crypto, or due to sudden drops in trading volumes.
Security risks are also something you can’t ignore in the crypto space. The digital nature of these assets makes them susceptible to hacking attempts and different types of digital fraud. You don’t have to look very hard to find examples of investors who have lost significant sums through cyber attacks on exchanges or their own wallets.
The regulatory environment is another big risk. It’s fair to say that there is definitely not a consensus from policymakers on the laws and regulations surrounding crypto. This space changes constantly, both inside and outside the US, and changes in laws could potentially impact the value of your crypto investments.
Risk Management Strategies
Although the long-term goal of crypto was initially to create a separate monetary system away from the traditional one, price movements today largely coincide with movements in traditional financial markets. This means that keeping an eye on the strength of the traditional financial markets can be a good way to manage your crypto investment risk.
Take the S&P 500 futures chart, for example. This futures instrument allows traders to speculate on the future of the S&P 500, an index featuring the 500 biggest large-cap stocks in the US. If the sentiment is bearish and investors view the S&P 500 as falling, this could be a good signal to crypto investors to diversify and manage their risk.
Even ignoring the futures market, diversification should still be one of your main risk management strategies. It’s a good idea to invest across different types of cryptocurrencies, or even have some exposure with more traditional assets.
Setting realistic goals is another good way to manage your risk. It’s easy to get sucked in and think you’ve hit the jackpot, but those opportunities are rare. Instead, take regular profits so that if things turn south very quickly, you won’t get hurt too badly.
The crypto market is still relatively immature, but it’s likely to stick around for the long haul. You can make investing in this industry work, but you have to be smart about it. Stay vigilant, be always willing to adapt, and don’t take unnecessary risks.
