Cryptocurrency Investing Risk Management: As I’ve covered in previous videos, cryptocurrency risk is one thing that you can’t ignore when investing in this exciting market. That’s why, in today’s educational piece, I’d like to briefly cover some cryptocurrency investing risk-management methods you can quickly use for your investment portfolio. If you’ve ever followed my investment education and strategies in our Premium Investing Group or any of our education services, you’d know I talk a lot about methods to calculate your unique risk tolerance. That is because the only way you can achieve your investment goals is to invest at a risk level consistent with your risk tolerance assessment. Here are three simple guidelines for your cryptocurrency investing risk management.
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Three Cryptocurrency Investing Risk Management Methods
1- Build your emergency fund first.
You can calculate your emergency fund by dividing the value of your total immediately available cash, by your necessary monthly expenses. That will give you the number of months you can survive with no additional cash flow. The result must be greater than six months. But the more, the merrier. For more on risk tolerance calculation attend this free MasterClass, and read my book, Cryptocurrency Investing for Dummies. Building your emergency fund is actually the one thing you must have before creating any investment portfolio, let alone adding cryptocurrencies to it. Once you have a high enough risk tolerance, you can move on to the second cryptocurrency investing risk management guideline.
2- Be Patient
The risks involved with cryptocurrencies are slightly different than those of other, more established markets such as equities and precious metals. However, when it comes to managing your portfolio risk, similar methods can do the work. The most common reason many traders lose money online is the fantasy of getting rich quick. However, I can say with confidence (verifiably) that the vast majority of my long-term students made money and in many cases a lot of money but the key has been patience.
“Patience is a profitable virtue” is the mantra of our PowerCourse students. While the majority of our portfolio holding had been equities and forex, the same has been true to cryptocurrency holders. It took years, nine years to be exact, for early Bitcoin enthusiast to make any return on their holding. And while we saw a bit of a bubble back in 2017, there is nothing stopping the markets to reach and surpass the all-time-high levels in the coming years.
The patience mantra doesn’t only help long-term investors. It also goes for traders and speculators. Very often, that investment or speculative position you underwent may go down or sideways for what seems like forever. Sooner or later, the market will take note of the sentiment and either erase losses or create new buy opportunities. Learn more by flipping through Cryptocurrency Investing for Dummies.
3- Diversify outside and inside your cryptocurrency portfolio.
The “don’t put all your eggs in one basket” rule. Again, this is a same-old investing advice that remains true to our revolutionary cryptocurrency market. But other than diversifying your portfolio by adding different assets such as stocks, bonds, or ETFs, diversification within your cryptocurrency portfolio is also important. In Chapters 3 and 25 of my book, I provide some ideas for this cryptocurrency investing risk management method.
But for now, here are some examples of grouping up cryptocurrencies for diversification purposes:
* Major cryptocurrencies by market cap. This includes the ones in the top 10. At the time of writing, these include Bitcoin, Ethereum, Ripple, and Litecoin. See Chapter 7 of Cryptocurrency Investing for Dummies for details.
* Transactional cryptocurrencies. This is the original category for cryptocurrencies. Transactional cryptocurrencies are designed to be used as money and exchanged for goods and services. Bitcoin and Litecoin are examples of well-known cryptos on this list.
* Platform cryptocurrencies. These are designed to get rid of middlemen, create markets, and even launch other cryptocurrencies. Ethereum is one of the biggest cryptos in this category. It provides a backbone for future applications. NEO is another prime example. Such cryptocurrencies are generally considered good long-term investments because they rise in value as more applications are created on their blockchain.
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* Privacy cryptocurrencies. These are similar to transactional cryptocurrencies. But they are heavily focused towards transaction security and anonymity. Examples include Monero, ZCash, and Dash.
* Application-specific cryptocurrencies. These are one of the trendiest types of cryptos, who are used to serve specific functions and solve some of the world’s biggest problems. Some examples of such cryptos are Vechain (Used for Supply Chain applications), IOTA (Internet of Things applications) or Cardano (Cryptocurrency scalability, privacy optimizations etc.). There are ones that get super specific, such as Mobius, also known as Stripe for the blockchain industry, that was seeking to resolve the payment issues in the agriculture industry in 2018.
Depending on the specifics of each project, a number of these cryptos could prove highly successful. You could pick the ones that are solving issues closer to your heart while analyzing their usability, application performance, and project team properly. Join our investing group to get the latest investing strategies, stop-loss, take-profit and other limit order ideas on cryptocurrencies, forex and stocks. Our comprehensive signals will help you create a unique strategy for you, according to your risk tolerance.
As the 4th point of the IDDA technique, you must calculate your risk tolerance before deciding on the investment strategy that is suitable for your portfolio.
Don’t forget to complete your risk management due-diligence before developing your investment strategy.