How to manage risk when trading bitcoins.
When it comes to investments, traders are well aware that the higher the risk, the higher is the returns. And the one who successfully manages the risk involved is the one who ends up with greater returns. When it comes to investment, risk management is key to growing your wealth and this applies for stock and bitcoins. In Singapore, digital currency is yet to be regulated by the government. This means that may not have the full protection offered by the Securities and Futures Act. Traders also constantly face the looming fear of a possible collapse of the entire cryptocurrency system. To add to that the year 2017 saw a drastic increase in the volatility of bitcoins in the market. The above-mentioned factors greatly contribute to the risk involved in bitcoin trading. The main focus of this article is to understand the risks that entail the process of bitcoin trading and sustainable ways to mitigate this risk.
Invest a small percentage of your capital
Risk management calls for some prudence on your part. This means you should always trade with a low percentage of what you own. Every exchange you make leaves you with a chance of either losing or gaining money. If you lose a small amount, it won’t come across as a major loss. This conservative approach is good for newbies who plan to do bitcoin trading.
An article posted on the Bitcoin Trading Site has explained this concept with the help of an example. If your trading capital is 3 bitcoins and you want to make a day trade with BTC against USD within a bear trend, so you want to sell and buy back at a lower price.
For this trade, you take 3% of your capital, which would be 0.09 BTC in that case. Now, within the trade, you split this position again in various parts. This means you first set a sell order with 20% of your 0.09 BTC, for instance. When you see that the market behaves in your favour, you sell another 10% or 20% and so on, till you’ve sold your complete 0.09 BTC.
So even if the price should rise suddenly again within your trade before you’ve sold all of your 0.09 BTC, you’ll be happy that you’ve split the position and haven’t sold all at once when the sudden price rises happens. This way you would have successfully managed your risk.
Research
Just as you keep track of all stock market news while trading in stocks, it is important to be updated on the latest bitcoin news. This information will help you determine the upswing or downfall of bitcoin prices. You will then be able to get a good understanding of the emerging trends and patterns in the bitcoin world. It would also be helpful to look for different types of risk management tools online. These tools can give you crucial insight on the risks involved in bitcoin trading.
Diversify
While diversifying is considered to be a safe bet while investing in the conventional choices like stocks, mutual funds, bonds, real estate, etc. it is known to be effective with bitcoin trading as well. See to it that you diversify your trading portfolio across various several bitcoin exchanges. So, even if one platform fails, you will still have bitcoins to trade with.
Use stop-loss orders
Traders commonly use the stop-loss order while trading with stocks. This phenomenon can be used for bitcoin trading as well. Investopedia defines this concept as:
“A stop order that can be placed with most brokerages. The order specifies that an investor wants to execute a trade for a given stock, but only if a specified price level is reached during trading.”
The aim of implementing a stop-loss order is to limit your losses in a particular exchange. It’s a safety glove that prevents you from losing money beyond a set limit.
Have an exit strategy
In your quest for increasing your wealth, make sure you have a set target amount to make profits. Once you have a target in place, find ways to achieve that amount while trading. Determine your risk to reward ratio. The three things that show your risk to reward ratio are your entry, exit target and stop loss. Map out your trades well in advance and identify what works for you the best. This way you would have planned an exit strategy for yourself before the market stops favouring you.
So, these were a few ways to balance the tradeoff between risk and return during bitcoin trading. Most of the strategies are similar to conventional trading. The only difference here is that you are dealing with a highly volatile, decentralized cryptocurrency.
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