Summary of this article
Analyze fundamentals, market sentiment, and technicals before investing crypto.
Diversify holdings, size positions, and manage risk-adjusted returns carefully.
Control emotions, use technology, maintain discipline for long-term gains.
By Mridul Gupta
Crypto has emerged as one of the most dynamic asset classes in today’s digital era. It continues to create headlines, attracting both new investors and seasoned traders. Like all asset class, crypto has its fair share of volatility, which many traders often consider as an opportunity, especially those traders who approach the market with discipline and insight.
While the investment landscape offers opportunities and returns, there are certainly risks associated with crypto. Therefore, the traders and investors alike must develop a risk management before diving deep into crypto.
Understanding the Asset Class
Undertaking a sound approach starts with evaluating the fundamental elements that make up a project – its team, technology, adoption rate, and governance. Weak fundamentals often translate into higher long-term risk. Alongside these criticalities, investors must also conduct a thorough and technical analysis of price patterns and trading indicators to assess the probability of short-term outcomes. A third lens is market sentiment, visible in trading volumes, social media discussions, and news flow. Together, these perspectives provide early warning signals that allow investors to avoid or limit potential damage.
The Role of Volatility and Risk-Adjusted Return
Volatility is inherent in every asset class. Trying to eliminate volatility entirely also eliminates return potential. A more suitable option for investors is to focus on risk-adjusted performance – whether the return justifies the volatility endured. Just like equity investors who utilise the Sharpe ratio, crypto investors can similarly measure performance against volatility by using either historical price swings or simplified return-to-risk calculations.
Protecting Capital Through Discipline
Some basic safeguards can help in protecting loss of capital in crypto. Investors can protect themselves by:
● Establishing stop-loss orders to curtail downside.
● Having entry and exit points to prevent emotional or reactionary trades.
● Adopting dollar-cost averaging (DCA) to steadily build positions while diminishing the impact of sudden market swings.
● Reviewing portfolios on a regular basis to recalibrate amid evolving market conditions.
These steps prove instrumental in assuring structure and coherency in a market that’s vulnerable to sudden escalations and sharp corrections.
Diversification and Position Sizing
Diversification in crypto goes beyond merely possessing multiple tokens. It translates into spreading exposure across categories like large-cap assets like Bitcoin and Ethereum, mid-cap altcoins, and even Stablecoins. Investors today have access to a host of opportunities spanning decentralised finance (DeFi) and non-fungible tokens (NFTs) to layer-2 scaling solutions.
Identical to how equities extend thematic plays in sectors like EVs or green energy, crypto also continues to develop its own themes. While meme tokens have managed to grab eyeballs and gained traction in recent years, the rise of AI-powered crypto and tokenised real-world assets (RWA) is by far, more substantial. Therefore, AI-driven projects utilise machine learning to optimise smart contracts, automate trading strategies, and enhance security-applications that strategically allude to sustainable and real-world use cases. Including such innovations in a portfolio broadens exposure and positions investors to gain advantage from more resilient sectors in the face of market trepidations.
Normally, a perfect portfolio is a veritable blend of lower-risk tokens (like Bitcoin and Ethereum), medium-risk assets (such as layer-1 protocols), and higher-risk altcoins.
Position sizing holds equal relevance, too. Instead of proceeding in binary terms of procuring or selling, investors should gauge the weightage of a particular portfolio asset on the grounds of conviction, valuation, and risk profile. This approach facilitates a well-balanced participation in long-term growth while securing against downside risks.
Managing Emotions and Using Technology
The crypto market’s frequent price moves can invariably take a toll on investor psychology. It is important to stay in control of one’s emotions, as apprehensions during downturns and avarice during rallies can result in mistakes. It is important to build emotional discipline by adhering to a clear strategy. Exchanges offer a number of algorithmic trading tools that can automate discipline and curb emotions in execution which is a must, especially for advanced traders.
Conclusion
These words from investor Peter Bernstein can be your guiding light in the world of crypto investing, “Volatility is often a symptom of risk but it is not a risk in and of itself.”
For crypto investors, the actual risk lies in ignoring fundamentals, overexposure, and indiscipline. If managed wisely, volatility no longer poses a threat. In fact, it becomes a trove of long-term opportunities.
The author is founding partner at CoinDCX
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.
