2022 was not the kindest to cryptocurrencies, ending on a pessimistic note with the events that marked November: the FTX collapse and Luna Crush. Crypto owners suffered significant losses, scaring away those who would see a beam of hope in Bitcoin, Ethereum, or other digital currencies. However, things started to settle at the beginning of 2023. If the Bitcoin price at the end of December was around 16,000 USD, it rose in February 2023, bringing its competitors up as well and making investors believe in a recovery.
The peaks-and-throughs of this volatile market are easier to navigate if you acknowledge the risks implied and the most common strategies to mitigate them, so let’s find out some essential aspects of safe crypto trading.
The risks associated with cryptocurrency
The high volatility of the crypto market can be both a blessing and a curse. For some investors, it is part of the appeal because it leaves room for high returns. Bitcoin’s volatility, for instance, even though it looks like it’s declining, it often moves by double-digit percentages weekly, meaning that you can “buy the dip” if you want to take advantage of a bargain price.
Cryptocurrencies aren’t backed or regulated by any financial institution or government. Unlike credit and debit cards that come with legal protection in case something goes south, cryptocurrency payments lack it. Suppose there’s a problem with a cryptocurrency transaction. In that case, it’s hard to contact an entity to resolve it, which is why investors are advised to trade only through trustworthy and reputable crypto exchanges.
Also, cryptocurrencies can be affected by gapping (or slippage) owing to the volatility of the market. This means that prices can shift from one level to another without touching the in-between level, possibly executing your stop-loss order.
Have an exit strategy
You should have an exit strategy right from the start of your investment. This implies determining when to take profits and when to reduce losses, as well as the fraction of your investment you should sell once you reach your price target.
As humans, crypto traders are also influenced by FOMO and other emotions, and are prone to emotional decision-making. But with an exit strategy in place, you know how to react when you face relevant issues, like changes in the macroeconomic environment, new regulations, or different news impacting the cryptocurrencies you own.
Here are several crypto exit strategy examples:
- Exit by return. This strategy means exiting a position once you’ve achieved your desired ROI. When you buy an asset, you likely have an expected return in mind. For instance, if you think getting $100 worth of Bitcoin is a good opportunity and you’d be satisfied with a 50% gain on your trade, when it hits $150, you sell.
- Exit by return amount. Just like the return percentage strategy, this one implies deciding on a target profit amount and dropping the trade when you achieve it, and might be a viable one if you have a specific opportunity outside the crypto market.
- Dollar-cost average out (DCA out). Think of this strategy as the opposite of the popular dollar-cost average plan. Instead of buying small chunks regularly, you’re selling on a regular basis. If you adhere to this exit strategy, you look to “average out” your position by selling small chunks over a period of time instead of the whole trade at once.
- Exit by market cycle. Buying in the bear run and selling at the top of the market is ideal. However, it’s easier said than done. To master this strategy, you must monitor indicators like price action, volume, market sentiment, and news events. When the bull run turns bearish, it’s time to exit.
Understand the risks carried by your chosen cryptocurrency
Since cryptocurrencies are all created differently, each one comes with a specific risk. Some, for instance, might be banned in your country, while others might be in a grey legal area. Owing to their protocols’ nature, some might be more vulnerable to security breaches, while others carry high liquidity risks with fluctuating market cycles.
It’s best to understand these differences and remember that, unless you go with some of the largest and oldest coins, other choices might come with hassles and trials.
Learn how to measure risks
Among the most significant risk rules before you venture into the crypto world is to determine the amount of money that you’re comfortable with losing, assuming the trade goes against your expectations. Usually, the amount of risk is a percentage of the trading account. You should use a maximum risk of 1% to protect your funds and play defensively until you learn how to trade properly.
The one-percent rule means you shouldn’t put more than 1% of your trading account or capital into a single trade.
Diversify, diversify, diversify
The reason why successful traders opt for different holdings is to protect themselves from market turmoil. You know how the adage goes, “don’t put all your eggs in one basket”? Diversifying your portfolio with different asset classes is the foremost pillar of investing.
Most of the time, this process means translating your financial goals, constraints, and context into a bunch of assets to reach your financial objectives according to your level of risk tolerance. Balancing your portfolio means you’ll go with specific investment products, like commodities, stocks and bonds, crypto included, to protect against market volatility while generating passive returns.
If you’re unsure about investing in digital currencies, look for companies holding these assets.
Some traders believe the bull market will appear towards the end of the year, while others are skeptical and would rather play it safe. If you’re not 100% sure you want to buy the dip but still believe in the potential of digital currencies, you may consider investing in a company with crypto holdings. They act as a bridge between market volatility and your funds, and the extent of risk implicated is mostly linked to the quantity of cryptocurrency the chosen business owns.