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Managing the Risks of Trading in Digital Assets

Managing the Risks of Trading in Digital Assets

The cryptocurrency market is actively developing. There are already more than 2 thousand species of emitted private digital currencies.

The high-risk level is one of the main characteristics of the cryptocurrency market. Many traders leave this market due to fear of losing. In this article, we will look at the basic rules for risk management in cryptocurrency, as well as find out how to control risks during the trade.

If you want to become a successful trader in INX digital assets investments, you must learn to evaluate, balance, and reduce risks. Only in this case, the capital will not only be preserved but also increased.

How far is Liquid Cryptocurrency?

A trader who has experience with cryptocurrency understands the states of Bitcoin-billionaires, about which the media is triggered; there is no reality. If they suddenly decide to sell all their tokens, the market will perceive it as a panic. At best, the course will seriously seek, and at worst – falls to zero.

For successful trading, it is important that there should always be what to buy and what to sell. In other words, sufficient liquidity must be provided. With small bidding volumes, the risk of lack of offer arises if you want to buy it or demand if you need to sell. Because of this, you can stay with a lot of tokens with a good course, but the inability to translate them into other currencies. And the benefits from such an asset – zero.

Risk management – work strategy in the financial market at which potential threats and possible profits are evaluated. Some brokers offer such a service. Its principle is that you can set a certain deposit bar and loss limit when the trading will be shown. There are no strict rules. You determine the limit values. The idea is that more profitable operations, in most cases, are conjugated with large risks. You can go to the deal, knowing that you either earn a little or lose a little. Or another option – to earn “everything immediately” or lose the weighty part of the capital.

For example, your deposit is 100 dollars. Losses amounted to 20% and 80 dollars left on your account. 1%, in this case, will equal 0.8 dollars. In order to achieve a deposit of $100, you need to earn 25%. That is, simply speaking, the more you have lost – the more you have to earn. In the desire to restore the balance, you can get into an even more minus. The process is avalanche-like.

Basic Risk Management Principles

Risk management includes the need to carefully choose the stock exchange and use it when trading the cryptocurrency. For transaction should use a minimum of capital, and the rest of the funds should be kept offline.

  1. The first thing the trader should do when investing is to calculate such a sum of money that it can completely lose. Psychologically, this mark is 10% of the monthly income. If you plan to continue to engage in this type of activity professionally, in no way trade with debit money taken from relatives, friends, or banks. Marginal trading should be approached with marginal caution because, in this case, the extraction of potentially high profits carries a significant risk
  2. Risk of liquidity. Consumers: Since systems are private, they are not controlled by the state as bank institutions. When carrying out a transaction, it is already impossible to cancel it.
  3. State position. Governments of such countries believe that legalization and wide turnover of digital money carry more risks than advantages and can seriously shake these states’ financial stability. For example, China has banned its banks from using cryptocurrency as a payment instrument. 
  4. High volatility cryptocurrency. Prices in the cryptocurrency market are very variable, and virtual money fluctuations are quite significant, and this also does not contribute to the user’s trust. Another point is decentralization. This is at the same time an advantage and disadvantage. Since there is no managing body, no one can maintain the minimum cost of digital currency. If the majority of investors decide to abandon Bitcoin and “throw out” a lot of coins into the market, that is, the risk that the course will collapse.

Methods of Risk Management in Trading

  • Do not commit too many deals per day. Recommended quantity – no more than three. The more transactions you make, the higher the risk of making a mistake.
  • You can keep a diary and write down all your transactions. This will create statistics and reveal which assets you get more profit from and where you lose; track trading dynamics for a certain period (day, week, month); 
  • Put the stop at the input and output of the position. It should be 0.2% of the entry point.
  • The size of the risk in relation to profits ideally should be 3:1.
  • It is necessary to invest in different projects, in each of which – from 5 to 30% of the deposit.

In Switzerland, transactions are legitimate. Business rules for the local crypto industry are set by the state regulator – Financial Market Supervisory Service (FINMA). For comfortable work on the country’s territory, crypto exchanges must receive a license in the financial management of Switzerland. The Swiss legislation considers cryptocurrencies as assets, operations with taxes on the property. Digital assets owners must give annual declarations. 

In 2021 in Switzerland, there will be a legal basis for regulating the crypto industry at the state level. Also, next year, the power of the Swiss canton of Zug will allow companies and private individuals to pay taxes in the two most popular – BTC and ETH.

Conclusion

With any form of investment, you must be able to advance and correctly determine the risks. In other words, it should be understood which potential profits we expect and at what losses are ready to go. Also, all of the above recommendations will not give the result without system trade, implying accounting, calculation, and analysis of all the positions open.

A truly successful trader is not the one who earned millions but the one who managed not to lose and remained in the market.

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