When trading cryptocurrency, risks arise that can not only deprive the investor of profits but also lead to losses. This usually happens when the risk is incorrectly assessed and the strategy is not appropriate. Risk is an integral part of working with cryptocurrencies, and there are ways to reduce it to a minimum and reduce the chance of loss to almost zero.
Arbitration by example
The abundance of unregulated cryptocurrency exchanges allows you to make money on arbitrage transactions, using the fact that prices for the same asset vary widely on different sites, explains Denis Voskvitsov, head of the fintech company Exantech. As an example, the expert cited the so-called “kimchi prize”.
In early April, the cost of bitcoin on the South Korean crypto exchanges Bithumb and Korbit reached 77.9 thousand won ($ 69 thousand). But the average market price of the main cryptocurrency was at the level of $ 58.5 thousand. In the field of digital money, such a difference between quotations in South Korea and the rest of the world is called the “kimchi premium.” This concept arose back in 2017 when bitcoin traded at $ 20,000, and on the South Korean exchanges, its price rose to $ 24,000 (+ 20%). At the beginning of the month, the “kimchi premium” reached 18%. As of April 14, it is 11.6%.
To exclude losses, you need to diversify your investment portfolio as much as possible and choose low-risk assets for it, says Apoorv Gupta, Co-Founder of CAPHIQ and CMO at AMEPay. According to him, the better the crypto portfolio is diversified, the more evenly the risks of depreciation of certain assets are distributed over it. The higher the potential return on investment, the higher the risks, he added.
“Altcoins and DeFi products are considered highly risky, so I would not recommend including them in your portfolio with a strategy with minimal losses,” said Saurabh Singla, Co-Founder of CAPHIQ and Contribution Author at INC42.
The best scenario for breakeven trading is long-term investments in major cryptocurrencies such as Bitcoin and Ethereum, according to CZ CEO of Binance. He advises to open a position not once for all available funds, but to periodically buy additional assets in equal parts. This will allow to average the purchase price and reduce the risks of entering the asset at the peak, added by CZ.
According to Denis Voskvitsov, in theory, you can trade cryptocurrency without loss using bitcoin futures with delivery in a few months – they have an impressive premium to the spot market. The expert explained that on some crypto exchanges the premium can be up to 40%.
“What should a trader do? Buy on the spot market and sell futures and, after some time, profit from the fact that the prices of futures and spot come closer (when the expiration date approaches), ”said the Founder of GMCoin Mehmet Ali Demirci
The catch of this approach is that a short position involves borrowing money from a broker or exchange, warned Denis Voskvitsov. And this is not an interest-free loan, and the payment greatly affects the final result, he added.