Investing in Cryptocurrency: How to Manage Your Risks?
In this section, I’m going to tell you how to manage your risks while investing in cryptocurrency!
If you’re reading this section, chances are that you know a thing or two about how to start investing in crypto, or it’s at least a topic that interests you, and you’re beginning to look into it. Whatever the case might be, one thing’s for sure - as the crypto market evolves, there are more and more people who are developing an interest in investing in crypto.
That’s awesome! However, I probably don’t need to tell you that it’s something that comes with some specific risks, as well - it’s not all just sunshine and rainbows, mind you! Before you start investing your hard-earned money into crypto, it’s crucial to understand risk management.
In this section, we’re going to talk about what are the risks of investing in cryptocurrency. To start off, we’ll discuss those risks, to begin with, and after that, we’ll talk about how you can both manage and avoid them, as well as improve your investing strategies, in general!
Let’s get to it!
Video Explainer
Video Explainer: Investing in Cryptocurrency: How to Manage Your Risks?
Reading is not your thing? Watch the "Investing in Cryptocurrency: How to Manage Your Risks?" video explainer
How to Avoid Major Crypto Investment Risks? (Beginner-Friendly)
What are the Risks Associated With Investing in Crypto?
Now, then - to begin, I’ll assume that you’re already quite savvy when it comes to the “standard” crypto concepts, such as crypto wallets, exchange platforms, how cryptocurrency transactions work, and so on.
If that’s not the case, before moving further, check out the previous sections in this Crypto 101 Handbook - there are sections dedicated to all of these topics!
So, the very first big question is rather self-evident - what are the risks associated with investing in crypto? Well, believe it or not, there are actually quite a few, really! The thing that makes this topic complicated, and void of a single, straightforward answer is that “crypto” is a rather broad term - do you want to invest in specific cryptocurrencies? Maybe you’re looking to buy NFTs? Or, you’re interested in using a dApp?
As you’ve probably guessed it by now, all of these investment options are going to come with their own risks. It can all get confusing, really fast!
Worry not, though - I won’t bore you with every single possible investment risk that exists. Instead, we’ll focus on what to know about cryptocurrency investing, and the main (or, most commonly-encountered) risks - if you understand how to avoid the most common ones, you’ll be able to apply that knowledge throughout the rest of your trading and investing ventures, no problem.
Now, then, what are these risks? Well, at the top of the list, you have the age-old saying - “never invest more than you’re willing to lose”. Unfortunately, probably the biggest risk associated with investing in crypto is just that - people not being smart with their budget, and thus, overinvesting into what is probably the most volatile market in the world. It’s the No.1 no-no when it comes to learning how to make money investing in cryptocurrency!
The risk here is pretty self-explanatory - if the market or project crashes, so will your portfolio.
That’s another point, too - investing in a single or a couple of crypto projects. While it’s not necessarily a “risk”, in and of itself, it can definitely become one. If you have 100% of your portfolio in a single crypto asset, and it suddenly crashes in price, you’ll be left holding the bag, with some huge losses that could have been avoided, otherwise.
Then, there are some of the more “direct” risks, so to speak. First of all, a big risk of investing in cryptocurrency has to do with the project that you’re putting money into being a scam, or a potential rug pull in the making.
This is something that is especially relevant during a bull market - a period of time when the whole industry is experiencing huge growth, and many people are throwing their money into any and all projects that they come across. Bull runs are when a lot of malicious players come into the market, create scam projects, hype them up, and then run away with the investors’ money, at some point.
Moving on, when discussing the most common mistakes that crypto investors make, it’s crucial to mention the platform (or, exchange) that you’ll be using. Put simply, while most of the focus usually lies on diversifying your portfolio and screening out any potential scams, it shouldn’t be forgotten that picking a reliable and trustworthy investing platform is definitely part of the deal, too!
In order to see just how important this is, all that you need to do is take a good look at the news cycle in the crypto space - it seems that, every other day or so, there’s a new breach in some platform’s security, or a new bankruptcy on the horizon. This has especially been exacerbated after the whole FTX exchange debacle.
Dealing With Cryptocurrency Investing Risks
So - those are some of the more common risks associated with investing in crypto. Of course, as I’ve mentioned earlier, there are many more potential risks out there - however, if you learn to deal with and manage the “main”, big risks, this should improve your investing journey, significantly!
Speaking of which, as promised, I won’t leave you in the dark - now that you know what are the risks of investing in cryptocurrency, let’s discuss how to deal with these risks. Note that none of this is going to be financial advice - just some tips that I’ve gathered throughout the years. Make sure to always consult with a qualified professional before any and all investing-related ventures!
Now, first and foremost, when it comes to “not investing more than you’re willing to lose”, the solution is simple - assuming that you have a stable monthly income, you should create a set budget every single month, of just how much you can put into your crypto investment portfolio, without it impacting your life.
A good way to look at it is by thinking - what if this amount of money simply disappears? Will it impact me in any way? Will it hinder my quality of life? If the answer is “yes”, you’re probably overinvested.
The question of portfolio diversification is closely related to this topic, as well. Most experts will tell you that it’s never a good idea to invest into a single asset, whether it’s a cryptocurrency, a stock, or anything else. Instead, it’s important to do some in-depth research, find a few different projects that have potential, and diversify your investment among them.
Truthfully, investing in different asset classes is often an even better idea - however, this is something that falls far beyond the scope of this section.
Moving on, we have the difficult question - how to avoid crypto scams, and choose a reliable project to invest in? Well, as you can probably guess, there’s only one answer - research, research, and more research. If you’re going to learn how to start investing in cryptocurrency, you’re going to be doing A LOT of that.
I’m not kidding, mind you! There really is no way around it - whether it’s the middle of a bull run, or a deep Crypto Winter, before committing any of your money towards some sort of a project, you need to perform an extensive amount of research.
If you’re not sure where to start, I've written a section about rug pulls (how to spot and avoid them), how to do research, and how to vet different projects and project types. Check it out - perhaps that’s exactly what you need to kickstart your crypto investment journey?
Outlining a few of the bigger aspects here, you should always perform a background check on the founders and the team behind a project, read through the whitepaper and roadmap, check out the community, and look into whether the project has any notable names standing behind it, in the form of venture capital investments.
If all of these aspects are in-check, it’s a good green flag to start off with - you can then look into some of the more detailed aspects concerning the project.
Last but not least, the investment platform of choice. Obviously, nowadays, there are countless numbers of different crypto exchanges and brokerage platforms out there, all offering their clients a wide array of benefits and features. This makes it very easy to get lost and confused, and end up picking a platform with a less-than-stellar reputation.
In order to avoid this confusion, you should spend just as much time vetting out your exchange of choice, as you’ve spent researching the cryptocurrencies that you’ve decided to invest in. Check the reputation of the platform, its security measures, history of break-ins, whether or not it has some sort of insurance on deposited assets, as well as the fees that it will charge you.
Different additional features are cool and all, but security and fees should always be at the forefront of your research. If any of these two aspects are lacking, you could end up losing all of your assets, or paying a huge amount of money every single time that you perform a trade or crypto acquisition on the exchange.
Wrapping Up
So, then - those were some of the most common risks associated with investing in cryptocurrencies, as well as my personal tips on how to deal with each one of them. One thing that I do want to add is that these risks (as well as tips) are going to be applicable to most types of crypto investments that you might think of - whether it be crypto coins & tokens, NFTs, dApps, or anything in between.
To sum all of it up, let me just reiterate - the best ways to manage your cryptocurrency investing risks is to set an investment budget, as well as do as much research as you possibly can. Obviously, consulting a licensed financial advisor should be a priority, as well.