Crypto investors face many risks because the crypto industry is still young and largely unregulated. While the industry has proven to be profitable over the years, it is clearly still full of risks, and anyone can fall victim to such risks.
The risks could be due to scams, attacks, or mistakes investors and traders make when they want to make some money out of crypto. Whether you’re a trader or just someone who buys and holds assets, there are precautions you need to take in order to ensure smooth investing and or trading.
The following are five important ways you can significantly reduce your risks and increase your chances of being successful. These are important because no matter how old or young you are in the industry, there’s always a chance of being at risk, so it doesn’t hurt to use a little bit of caution.
Don’t Invest More than You Can Afford to Lose
As a general rule in investing, you shouldn’t invest more than you can lose without worrying too much. This is doubly important in crypto because just as the industry can be highly rewarding, it can also be very risky and you can lose everything in the twinkling of an eye.
In traditional finance, this is referred to as the 1% rule, which states that you shouldn’t risk more than 1% of your capital in any investment. For traders, this may mean only riking 1% of your trading capital should the trade go against you.
Use Stop Loss and Take Profit
This is a separate point, but is like a continuation of the first. In order to ensure that you don’t risk more than one percent, you should use a stop loss. This is a feature on probably every trading platform, that lets you set the price at which the system should end the trade if it goes against your prediction.
Taking the 1% rule for instance, if you have a capital of $10,000, you should set your stop loss at $9,900. That means you can only lose up to $100, which is 1% of your $10,000 capital.
Stop losses can save your trade even when you’re not physically present, since they are executed automatically once the set conditions are met.
Another feature you should use is the take profit. This is a feature that allows you to set the price at which the system should stop the trade when you have made some profit.
This is important because without a take profit, your trade could go the way you predict, reach a certain level and the price reverses. You can lose all your gains and even lose some of your capital if you don’t have a take profit in place.
Diversify
Diversification is an old investment strategy that works even today. The idea is that you shouldn’t invest all your capital in just one asset. Instead, you should spread your investment across assets.
For example there are many different crypto assets – Bitcoin, Ethereum, XRP, etc. Rather than invest all your capital in Bitcoin, it is advisable to spread the investment into other assets as well.
That way, you can make up in other assets if a particular asset fails and the other assets do well. It is unlikely that all the investments will fail.
Don’t FOMO
FOMO means fear of missing out. This is something that is quite common with crypto investors. Let’s say a new coin was launched and the price went wild.
Investors see that, and everybody wants to get in. Unfortunately, the time when FOMO kicks in is usually when the price of an asset is set for a reversal. Don’t do it.
Do Your Own Research
This cannot be overemphasized. Before investing in any assets or assets, take time to research the asset and ensure that it is a legit investment. Of course this is not necessary for known assets like Bitcoin and Ethereum.
Before investing in a new low cap asset though, take the time to do some background checks before investing, no matter how tempting. It may be the one thing that saves you in the end.
