In 2022, the fall through of crypto exchange & hedge fund FTX occurred. This hurt firms and investors. So, FTX’s bankruptcy brought about a forewarning for those who wrongly estimate the risks of investing in Cryptocurrency (bitcoin-equaliser.com)
The confusion about leverage and financial competence coupled with the trading force of FTX, i.e., Alameda Research, resulted in the liquidation followed by the arrest of Sam Bankman-Fried – CEO of FTX. And this sequence of events in the crypto exchange advanced to a loss of billions in the crypto market.
The disturbance in FTX and the proceeding “crypto winter” accompanied the decline of the stablecoin TerraUSD (UST). Along with TerraUSD, LUNA also suffered a reduction in May 2022. However, in the first two months of 2023, Cryptocurrency, along with BTC & ETH, have overcome the losses suffered in 2022.
Presently, the market capitalization of crypto has surged by $1 trillion. This is a reminder in the market that the crypto winter is over. As it may be, financial advisors advise investors to be cautious about keeping crypto investments limited to a small percentage of their portfolios.
Uncertainties of Investing in Cryptocurrency
The trickster news and allegations about the world’s largest crypto firms display an evident sensibility that the red flag manifested by regulators holds some truth. FINRA and the Consumer Federation of America are among the big names of financial regulators.
The Certified Financial Planner Board – CFP Board suggests six particular risks or uncertainties involved with cryptocurrency investments. They are as follows:
- Prediction and Volatility.
- Complications with assets evaluation.
- Custodial likelihoods that may bring about loss.
- Obstructions with valuing crypto assets.
- Unrecorded assets and marketers are operating beyond the boundary of regulatory frameworks.
- Doubtful regulations.
The crypto values rise and fall adequately, leading to increased risks in investment. Only in the short term of 13 years (approx.), the history of crypto and digital assets holds valuable losses and theft at a large scale.
As per CFP Board, investors can manage the risk associated with cryptocurrencies. For such investors who want to continue investing in digital coins need to adopt specific risk management strategies
How to Be in Charge of Cryptocurrency Risk?
Just stick to these five cryptocurrency portfolio management strategies to compress the risk that comes with crypto investment –
- Diversification of Crypto Portfolio.
- Go with a Viable Crypto Exchange.
- Deal with Cold Storage.
- Carry Elementary and Underlying Research on Digital Assets.
- Be a Guest on the News.
Diversification of Crypto Portfolio
Don’t rely on a particular crypto portfolio. Instead, diversify your crypto investments. This is an excellent method to be in charge of the volatile nature of the crypto market. Some of the ways to attain diversification include the following –
1. Asset classes
Branch out your investments in crypto assets like Bitcoin and Litecoin (LTC). These two coins are best for exchange matters. You can also invest in utility tokens like Filecoin (FIL) and Binance Coin (BNB). Stablecoins and Non-fungible tokens are yet other good options.
2. Use cases
Rely on various use cases that Cryptocurrency has to offer you. For example, investors can opt for the ETH network (Ethereum) that contributes to smart contracts and creates decentralized applications. Investors can use decentralized finance or the Internet of Things for supply chain management.
3. Industry & Location
Cryptocurrency has impacted several industries like, finance, gaming, social media & technology. Spreading investment here can lead to huge benefits. Also, diversifying investments by location could be one of the best ideas to manage risks in the crypto market.
Go With a Viable Crypto Exchange
Choose exhaustive and credible liquid exchanges to control uncertainties in crypto investment. Unregulated providers do not have a higher probability of self-confidence related to risk management.
Deal With Cold Storage
You have yet another mechanism to handle custodial risks, i.e., cold storage. Cold or offline wallets are more guarded than hot or online wallets. This strategy is a ‘go’ for those crypto investors who don’t repeatedly buy and sell shift to a cold wallet. Just purchase their crypto assets and relocate them to a hot wallet during the time of the transaction.
Carry Elementary and Underlying Research on Digital Assets
As an investor, you must research the underlying aspects related to the crypto market. Search for what values crypto offers to its investors. The fundamental evaluation of the crypto asset establishes long-term price movements. Moreover, the underlying research on digital assets fortifies investors against overpaying for an investment.
Be a Guest on the News
Every report – be it positive or negative is not always valid. So, investors shouldn’t fail to stop every negative news they hear. Instead, follow reliable media reports to gain awareness about events affecting the market’s investments.
To date, Cryptocurrency is a flight of fancy, and no one is confident about what may come tomorrow and what the future holds. But investors who are disposed to look on the bright side of the crypto’s future line must operate on strategies to mitigate risk.