The cryptocurrency market has grown exponentially, and with it comes price volatility. Price volatility attracts new investors when the market is in a bull run, but it also scares new investors in a bear market. If you've been considering investing in cryptocurrency but are worried about losing money, I'll share some tips to help reduce your risk in crypto investing. Before investing, you should always do research to alleviate your fears and doubts about an investment.
Long-term investing in quality crypto is a proven strategy to reduce risk. People who bought bitcoin and held on to it for more than 5 years made money. Even if you were unlucky enough to purchase at the peak in December 2017, your bitcoin holdings would be profitable less than five years later. Although not all crypto projects have recovered from their all-time highs, most of the leading crypto projects have set new all-time highs during this bull run. Having a long time horizon will alter your perspective on market volatility. Instead of being afraid of market declines, you will start to see them as buying opportunities.
2. Use Dollar Cost Averaging to Minimize the Risk of Buying at the top.
If you have a large sum of money to invest in cryptos but are afraid of putting it all in at once, you can use dollar-cost averaging to spread your investment. If you are scared of buying at the top and want to invest a large sum in crypto, buying at specific intervals will spread your capital and average out the price fluctuations. If you started buying at the market's peak and continued to purchase during the drop, buying when prices fall will reduce your losses. Using dollar-cost averaging also removes emotions from the equation since you will be investing regularly regardless of whether the market is up or down.
3. Only Invest the money you can afford to lose and never use leverage.
When it comes to investing, never use money intended for other purposes. If you invest money that is needed soon, you risk selling your trades at a loss when the need arises. Another mistake many new investors make is borrowing money to invest in crypto. When the market turns against you, emotions will cloud your judgment since you must worry about paying back the loan. The crypto market can go into a bear market which can span more than a year. If you are unfortunate enough to buy at the top and your investment dropped by 90%, you will be paying interest on your loan until your investment can recover.
Another type of loan a lot of people use is leverage. Leverage is excellent if your trade is going your way, but when the tide turns against you, you run the risk of a margin call. When there are not enough funds in your trade to cover the loss, your trade will close, and it becomes a permanent loss. You won't recover your losses since there isn't anything left in your investment.
4. Limit your exposure to highly speculative low cap crypto
One of the common misconceptions about crypto investing is that it is a fast and easy way to get rich. People are drawn by the If you focus on getting rich quickly in crypto, you are bound to invest in highly speculative projects. People who enter the market in a bull run misconstrue crypto investing as a fast way to get rich. The adage that "everyone is a genius during a bull market" holds for crypto investing. During a bull market, gains in the crypto market become so ridiculously high that people often forget that the massive profits won't go on forever, and there are bound to be corrections along the way.
5. Always remember to secure your profits.
It is common for crypto to attain massive gains in a short span. When you are lucky enough to begin investing in crypto during a bull run, investors can more than double their investment in less than a month. There is always a correction at the end of a bull run. You should always set target profits to prevent losing your gains. When your investment is up by 200%-300% in a short period, it is easy to get tempted to add more to your trades. When everyone is euphoric with their gains and predicts ridiculous gains in the future, this is usually the time when a correction is near. Setting sell orders will prevent you from giving in to your emotions. One strategy you could do is sell a portion of your position and secure your capital. Once you have secured your money, you can HODL the remaining tokens and set target prices at specific prices. Another strategy you can use is to use the dollar-cost average method to exit your trades. You can select a price target and take profit using DCA until you recover your capital. Whichever strategy you use, securing profit is essential to have the capital to buy in once the market goes down.
6. Don't buy when the market is at an all-time high.
Whenever an asset is at price discovery territory, the risk of buying at the top increases. Waiting to buy the dip will lower your chance of buying at the top. There will always be other opportunities to buy in at a reasonable price. Even if the prices won't return below the initial price, the risk of buying at the top outweighs the benefits of the price going up further. The only sure way to profit from anything is to buy low and sell high. If you continue buying at all-time highs, you run the risk of buying high and holding those assets for a long time before you can sell them at a higher price.
7. Diversify your portfolio
Spreading your investment in a few cryptos will mitigate the risk of losing your investment if a project goes bust. If you are the type of investor that likes investing in highly speculative cryptos, it is advisable to diversify your portfolio. Most of the biggest gainers in the previous bull runs were small-cap cryptos. These cryptos attract new investors since these are the cryptos that the media often cover. Many people became millionaires because they invested a small amount very early in a project. The media doesn't show the people that lost money on several small-cap cryptos. The lower the rank you go in the crypto market, the higher the risk and reward. For every SHIB that rallied to the top ten within a year, there are several hundred that never made it or, worst, crashed to zero.
8. Find ways to earn passive income from your crypto.
Another way of reducing your losses when the market is downturn is to invest your crypto holdings to earn passive income. Staking and lending are some of the popular ways to earn passive income for your crypto. Parking your crypto in these investment vehicles will help reduce losses during a bear market. You could explore other advanced investment vehicles: liquidity provider, dual investment, and farming.
When investing in volatile assets such as crypto, protecting your capital is more important than making profits. If you are too focused on making profits and neglect taking precautions on your money, you might end up losing everything. I hope these strategies will help you in crypto investing. If you have tips you would like to share; I would be happy to read them in the comments section.