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Risk Management and Digital Assets: Tips for Success

By Bruno Macchialli
August 27, 2021
in Cryptocurrency, Digital Assets & Crypto, Featured Content, Fraud & Security, Fraud Risk and Analytics, Industry Opinions
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Risk Management and Digital Assets: Tips for Success

Risk Management and Digital Assets: Tips for Success

Cryptocurrencies offer significant returns on investment and are relatively easy to purchase. Inducing them in your portfolio of traditional assets could be an excellent way to see the high upside potential on calculated investments quickly. Obviously, cryptocurrencies are not without their risks—their volatility is ubiquitous with the entire asset class. 

Yet, there are still ways to profit from your investments into crypto while minimizing loss when things inevitably take a turn for the worse. That said: You will at some point lose money investing in at least one or more crypto assets in your portfolio, but that doesn’t mean you need to lose money investing in crypto assets as a whole. Here’s how to be smart about it:

Set realistic goals 

Don’t expect that coin you bought on a hot tip to “moon.” Start with an amount that you are comfortable to lose and pick something that you understand. Talk to your financial advisor, check out multiple sources or screen the list of existing coins on CoinMarketCap and see what’s trending and begin doing some cursory research. When an eccentric billionaire announces he will suddenly take Bitcoin [BTC]  as a form of payment for an expensive product he sells, and then shortly thereafter changes his mind because he suddenly claims he had no idea that mining BTC was terrible for the environment, this might cause the price of ‘carbon friendly,’ or ‘green’ coins to shoot through the roof. For example, if you had Cardano [ADA] in your bag in May 2021 when something nearly identical to this happened, you would’ve seen the price rocket from around $1.61 to its all-time high (ATH) of $2.30. 

If you’d been watching the market at the time and were happy with snagging a 42% profit, you could’ve come out ahead. Much has been said about Cardano and its supposed ability to do whatever it’s supposed to eventually do. Still, long-term holders of the asset (it’ll go to $30 one day and kill Etherum [ETH], you just watch) have since witnessed the decrease in value by 23% as of the second week of July. 

That said, it’s always best to set a price target when it comes to crypto, but sometimes a quick 40%-to-11,000% increase will do the trick as opposed to sitting on something without selling until you’ve made a fool of yourself.

Educate, educate, educate

Whether you’re going it alone or working with an advisor, you must educate yourself on cryptocurrencies and the world of digital assets. It’s not enough to take the advice of a single ‘expert’ no matter how informed they claim to be, given the volatile nature of the asset class as a whole.

This is true whether you’re a first-time investor, a crypto veteran, or a financial advisor. That’s because the market can change drastically in as little as three to six weeks, meaning everyone needs to constantly educate themselves to keep track of what’s going on.

Even if you’re working with an advisor, you will still need to greenlight decisions. Having a basic understanding of the market helps you understand the information being presented so that you’re comfortable with each investment decision. You also need to inform your advisor to have some sort of hedges in place if that depreciates the value of your entire portfolio overnight. 

The good news is that you don’t need to go to Harvard or train to be a licensed stockbroker to get a basic understanding of digital assets. Try reading publications like Cryptonews, Cointelegraph, and Coindesk to gain a cursory knowledge of the subject, and be prepared for things to be thrown into complete dissolute chaos the second the Chinese Communist Party mentions anything related to crypto. Most importantly, read well-known, qualified sources and don’t rely on any tip that comes from non-financial experts.

Don’t fall prey to FOMO 

As mentioned, it’s not advisable to only use social media for your crypto education. Not only is the information unverified, but it’s also more likely to make you prey to the FOMO effect. 

Social media is attractive by design, and users wish to emulate the figures they follow. If you follow crypto influencers on social media, it could lead to some risky investment choices.

Perhaps a coin you’re interested in is having a rapid peak, and an influencer is advising everyone to buy coins now to avoid missing out. Or maybe a public figure with clout and rockets is picking holes in a coin, causing valuations to waver.

In either scenario, if you decide to buy or sell a coin based on this kind of advice, you are not making an educated, rational decision. It’s like that old adage about amateur stock traders. If you spent $300,000 on a house (an old adage indeed) and the next day a crowd of manic, emotional maniacs offer you $230,000 to buy the house—don’t sell the house.

Instead, it’s better to stick to your original investment plan, keep up to speed with investment news from verified sources, and avoid rash decisions. Sounds easy, right?

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Tags: CryptocurrencyDigital AssetsDigital CurrencyFOMOIndustry OpinionsInvestmentRisk Management

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