Risk management in crypto: Aka 'the art of not losing all your money'

Risk management is a vital element of success for any trader in any market. No matter the size of the capital you’re trading with or investing in, losses are going to be inevitable, particularly in highly volatile markets like cryptocurrency. Learning how to manage risk to minimize losses is vital. Yet, it’s also necessary to master risk management in order to ensure maximum gains. After all, the more you’re willing to risk, the greater the potential reward.

Risk management to prevent losses

Even experienced traders with impressive track records of reading the market can lose it all on one or two bad trades if they fail to employ proper risk management or let their emotions get in the way. The enticement of “hitting the jackpot” or chasing market sentiment can be too strong, allowing traders to become clouded or overconfident.

To prevent sweeping losses and allow traders to trade with a cool head, the very basic trading tools and forms of risk management must be used at the very least. These include establishing trading rules, such as market orders, limit orders and stop-loss orders, that allow traders to limit their losses by triggering an action when certain conditions are met.

With these types of mechanisms in place, traders can take a break from the screen and trade with confidence, knowing that they can limit their losses or take profit at an acceptable level. At what limit this is set will depend on the risk appetite of the investor and the amount of capital they are willing to lose on a given trade.

Another way of managing risk is, of course, the golden rule of always keeping a diversified portfolio spread out over several assets. This will allow you to gain exposure to more assets while hedging losses and ensuring that one bad investment doesn’t wipe out all your capital.

Risk management to maximize your gains

Last year in the cryptocurrency space, we saw astronomical growth with astounding gains from most major coins. Decentralized finance ignited a passion for yield farming and earning an attractive passive income on crypto assets, as well as enabling an entire ecosystem of borrowing and lending away from traditional finance. Against the backdrop of a struggling global economy due to the global pandemic and near-negative yield on cash savings, investors are turning to the crypto space in droves.

We’ve seen massive endorsements from institutional investors and major names, such as MicroStrategy, Guggenheim, PayPal and Square all lending legitimacy and fanning the flames of “institutional FOMO.” Bitcoin (BTC) has shot up like a rocket this year, blasting through its previous all-time high thanks to this action from institutions. MicroStrategy alone purchased more than 70,000 BTC last year, showing continued bullish support.

And as adoption from institutional investors grows, so does the need for more sophisticated ways of managing risk that go beyond basic market orders and allow professional and institutional traders to execute highly flexible and creative strategies that spread their risk across all assets and amplify the potential rewards.

Until now, such institutional-grade products in regards to risk management have been out of the purview of cryptocurrency exchanges. However, if we are to respond to the needs of this type of investor, serious exchanges must provide the infrastructure that institutions require, including the ability to cross-collateralize their positions and manage their risk more effectively.

Enhanced risk management for ultimate trading flexibility

Through features such as unified account management (otherwise known as Portfolio Margin), traders can manage all their accounts, trades and crypto assets from within one single interface. But more importantly, they can unify all their assets and trade with any instrument, using all of their purchasing power.

For example, let’s say a trader wants to enter an ETH/USD futures trade. With a unified account, they can do this efficiently without having to purchase Ether (ETH) and by simply using any of their existing crypto collateral. This is much more convenient for traders and also reduces the fees associated with buying altcoins with Tether (USDT) or BTC. It also allows them to take a much larger risk and position to amplify their earnings and substantially improve margin efficiency.

Risk management is probably the most important part of investing. If the crypto space is going to continue to grow and attract and retain the interest of institutional traders, we need advanced risk-management tools that can maximize gains for investors — and nudge the crypto market cap into the trillions of dollars where it rightfully belongs.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.