A Guide To Managing Your Crypto Investment Risk

Every market is subjected to a certain risk, but by following and learning a few laws, we can always create safe and secure risk management strategies. Here, we will be learning, in detail, about various risks associated with digital marketing and ways to deal with them.

Types of Risks

• Systematic (Market) Risk -Systematic risk is the risk that the entire market bears collectively, therefore it is called ‘undiversified risk’, ‘volatile risk’, or ‘market risk’. It is generally unpredictable and difficult to avoid. It also includes interest rate change, inflation, recession, and other major changes.

If the investor has diversified his assets i.e., invested in many assets belonging to other sectors, like healthcare, infrastructure, etc. Such investors can cope with the losses due to the systematic risk factor.

For Example, The Great Recession of 2008, during which investors saw drastic changes in figures and riskier (potentially profitable before) had to be sold whereas the simpler assets became more valuable.

• Non-systematic (Business) Risk — Unlike systematic risk, if an individual or specific company is subjected to the risk, then it will be called ‘Non-Systematic’ or ‘Unsystematic-Risk’. It is also called ‘Diversified-Risk’ or ‘Residual-risk’. This can also be handled by diversifying investments in various assets. However, even after doing so, the investor remains subjected to systematic risk.

Even though the investors may be able to anticipate some sources of unsystematic risk, it is still nearly impossible to be aware of all risks. It includes various kinds of risks, like business risk, financial risk, operational risk, strategic risk, and legal risks which we have discussed thoroughly in another blog entitled “Main Risks to Crypto-Trading.

Systematic-Risk v/s Unsystematic-Risk

• Systematic risk and unsystematic risk are opposite to each other. In the case of systematic risk, the entire market is prone to losses, whereas unsystematic risk affects the individual or private firm which has invested individually at its own risk.
• While the systematic risk can be somewhat measured by Beta, the unsystematic risk (which are of various types) cannot be estimated just by Beta.
• The Unsystematic-risk includes double risk i.e., Total risk of unsystematic risk factors and that of systematic risk factors.
• Systematic risk can be partly reduced with asset allocation, while unsystematic risk can be controlled with limited diversification.

Things You Can Do to Manage Your Crypto Investment Risk

• Diversifying Assets — By investing in various assets belonging to different sectors, both Systematic and Unsystematic risk factors can be controlled to a certain extent.
• By the Beta-Count — In the Systematic-risk particularly we can estimate the Beta-count. Beta measures the volatility of the investment.
• Doing research — By doing your research individually you can be prepared for the mishappenings and at least know how to deal with them.
• Reward/Risk ratios — By comparing the rewards (or profits) to the risk (loss) in terms of a ratio commonly known as the Reward/Risk ratio.
• By Investing Smartly — Keeping in mind the affordable risk factor, one can invest accordingly (i.e., smartly).
• Choosing Correct Platforms — Most the Crypto-Trading involves various digital platforms which issue certain protocols (in the form of algorithms) for trading. By carefully choosing the De-fi platform and studying all the protocols laid by that De-fi firm (even if it is end-to-end encrypted), we can minimize the risk up to a certain extent.
• Avoiding Excessive Leverage — By leveraging a lesser number of collaterals you make yourself subjected to lesser risk.
• Suitable Trading Strategy — All the market strategies are not suitable for the kind of investment you are making. One must always prefer the trading strategies that yield better quality of results than more quantity of return-asset it generates.

Final Thoughts

With the innovations in technologies, businesses are also evolving day by day. We must constantly keep ourselves updated and choose what is better for us and also by checking whether we even need it in the first place or not. One can obtain the necessary guidance but ultimately it is up to the individual whether or not to invest.