"Don't put all your eggs in one basket" - an old saying that embodies the essence of risk management. But did you know that 80% of new investors in crypto ignore this simple rule? The result: significant losses that could be avoided with simple steps.
My friend was a very successful and smart engineer; he took several months to study a promising coin project and then invested all his savings in it. He says, "I was confident in its success, so why diversify my investment?" A month later, the coin's price crashed by 80% due to a security flaw... Today, my friend considers risk management more important than predicting market direction... and unfortunately, he learned that the hard way.
The wise saying goes: the smart one learns from his experiences, but the smarter one learns from the experiences of others.
Risk management is not a strategy for the cowardly, but rather a weapon for the smart. In a volatile world like crypto, you cannot control market movements, but you can control your risks.
Here are the basics of risk management for beginners:
Diversification: Spread your investments across several cryptocurrencies and asset classes. Do not put more than 5-10% of your portfolio in one coin, no matter how promising it seems.
Follow the 40-40-20 method: "40% in relatively stable large coins like Bitcoin and Ethereum, 40% in mid-sized projects with strong fundamentals, and only 20% in small high-risk/high-reward projects."
The 1-2% rule: Do not risk more than 1-2% of your capital in a single trade. Even if you lose 10 consecutive trades, you will only lose 10-20% of your capital.
Stop Loss Orders: Predefine the point at which you will exit the trade if it moves against you. This prevents losses from getting out of control and removes emotion from the equation.
Stephen, an experienced trader, says: "I set a stop-loss order at 10-15% below the purchase price. I may lose on some trades, but I protect myself from major crashes."
Don't invest what you can't afford to lose: this is a fundamental law. Only invest surplus money that you won't need in the near future... and if you lose it all, it won't be a problem for you, nor will it occupy your mind much... This way, you minimize the impact of emotions on decision-making.
Robert Kiyosaki says: "Successful investors do not make big decisions based on strong emotions." In the world of crypto, emotions are the number one enemy of sound decisions.
Risk/Reward Ratio: Before any trade, ask yourself: What is the potential reward versus the risk? Look for trades with at least a 1:3 ratio - meaning the potential reward is three times the risk.
Yasmin, a financial analyst, shares her strategy: "Only enter trades that offer a risk/reward ratio of at least 1:5. This means that even if I’m right in only 20% of my analyses, I will still end up profitable."
Emergency plan: What will you do if the market crashes by 50%? Will you sell, buy more, or wait? Define your plan in advance, in times of calm, not in the midst of the storm.
As Warren Buffett says: "The real risk is not knowing what you are doing while you think you know." In the world of crypto, risk management is your compass in a tumultuous sea of volatility and surprises.
In the next post, we will explore the concept of simplified fundamental analysis - how to evaluate the essence of projects away from the market noise. Are you ready to discover the real gems in the world of crypto?
