Cryptocurrency & Risk Management – Our Guide
In the year 2017, as cryptocurrency became famous, many people decided to invest in it. Some, however, took investing to the next level. Some sold everything they had and spent their entire life savings on cryptocurrency. For a select few, they got lucky. The rest, however, paid the price. After the market crashed in 2018, many were left high and dry. If you’re planning to invest in cryptocurrency, you should understand the risks and trading psychology that is vital to the success of your investment.
Irrationality is Natural
Cryptocurrency is unstable and volatile. High risk, high reward is the name of the game. When getting into it for the first time, you must be aware of this fact.
“Don’t put all your eggs in one basket.” This is one of the principles of risk management. To diversify your investments means you reduce the risk of losing too much. According to the hypothesis of modern portfolio theory (MPT), economist Harry Markowitz states that when you diversify your assets, you minimize your risk and get the average. His research has also proven that investors can create a perfect portfolio.
MPT, in essence, is the process of building a portfolio that provides maximum returns at a specific set risk. This mathematical framework has been tried and tested by different groups of people. They found that when they applied the MPT framework, crypto promises higher returns than any other portfolios, but with greater risk.
Buying Low, Selling High
Buying low and selling high is a callous strategy to follow. It requires even the best traders to predict the rise and fall of prices. In the crypto world, this is even more difficult. Due to the steady incline in cryptocurrency prices, many of its players have been affected in a psychological manner.
It is human to follow the crowd. The fear of missing out and the fear of uncertainty and doubt plague us all. These fears play a massive role, especially in the trading world. Influential investors can easily be convinced by the news, which can cause prices to fluctuate. When the value of cryptocurrency drops, this induces a ‘fear’ factor in traders that will convince them to sell all their investments despite the loss, and regardless of whether this fear is rational or not.
Fix Your Attitude To Risk
Greed is never worth it. There are many stories of people who are so confident in cryptocurrency that they decided to pour their entire life savings into it. A native in the Netherlands sold everything he had for bitcoin. Another man ended up living in his car after selling all he had to invest in cryptocurrency.
Whether you live alone or have a family to support, it is ill-advised to gamble your life away on cryptocurrency. Before you make an investment, do your research. Understand the technology involved, along with the psychology of the market. Doing this will help mitigate risk and provide you with a safer portfolio to invest in. Remember, do not invest based on emotions alone.
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