Cryptocurrencies have huge potential as an investment, though they’ve also seen plenty of ups and downs. Unless you’re a professional trader, it’s wise to manage your risk by following sound investment principles.
Without proper risk management, investing in cryptocurrencies can feel a lot like gambling. One challenge is the plethora of cryptocurrency exchanges available, which can overwhelm both new and experienced investors.
Due to the lack of standardized regulations across the global crypto scene, inexperienced investors can easily find themselves competing with veteran traders. This “Wild West” environment leads to significant losses for many. Professional traders with advanced tools and years of experience see exchanges full of retail traders as easy opportunities.
According to Nasdaq, about 90% of traders lose their initial investment within six months when trading forex. Because cryptocurrencies are even more volatile than forex, it’s likely that over 95% of crypto traders lose money.
For regular investors, the safest approach is to invest rather than trade. Using different strategies to manage risk and aiming for long-term growth is essential.
Fortunately, new products are emerging that incorporate best investment practices. One such product is the Vest app.
### Avoid Chasing Hype
When it comes to cryptocurrency, patience is essential. Unlike other markets, cryptocurrencies are heavily influenced by hype cycles, which can send prices skyrocketing in a short time (a phenomenon known as “mooning”). If you see an asset on a moon mission, resist the urge to jump in. It’s crucial not to chase hype because the higher the prices go, the harder they fall. By staying patient, you can:
1. Avoid overpaying due to FOMO (fear of missing out).
2. Purchase the asset at a lower price after the hype dies down.
### Diversify Your Portfolio
Diversifying your portfolio is key to managing risk in the crypto market. You’ll find many people on forums proudly claiming they’ve gone “all in” on a single coin. This approach is risky, similar to playing roulette.
Instead, spread your investment across several promising assets. A good diversified portfolio should include more established cryptocurrencies with large followings. Additionally, it’s wise to hedge your bets by also investing in competitors.
### Dollar-Cost Average in Crypto
Investing should be a gradual process. Rather than putting all your money into an asset at once, use dollar-cost averaging (DCA). This means buying the asset in intervals over a set period, which provides exposure to a range of prices. Timing the market perfectly is nearly impossible, but DCA helps you average out your costs over time.
Here’s how DCA works:
1. Pick an asset and set a fixed schedule to buy it periodically, regardless of its current price.
2. A longer timeframe increases the chances of buying at low prices due to market cycles.
3. At the end of your schedule, calculate your average cost and hold the asset until you reach your predetermined profit targets.
### Bringing It All Together
By combining these strategies, you can build a strong and resilient cryptocurrency portfolio. The market is highly volatile, so it’s essential to stick to your long-term strategies without getting distracted by daily price swings.
In the end, gamblers react impulsively, while patient investors weather the storms and seize opportunities when conditions improve. By adhering to a few basic principles, you can protect your capital and enjoy peace of mind.
A product like Vest can simplify this process, allowing you to set up a diversified and dollar-cost-averaged crypto portfolio in just a few minutes.