Cryptocurrency has made many people successful millionaires, but at the same time, it has also pushed many towards suicide and crippled many organizations. Trading or investing in cryptocurrency can make you rich, but at the same time, it has its risks. There’ll be excellent gains sometimes, and other times, there’ll be bad times.
In April, Bitcoin got to its highest value of over $60,000 since its launch in 2009. However, some two weeks into May, the value came crashing to a little over $30,000. This crash had over $8 billion liquidated and no traces of about $500 billion. These are some of the risks you may experience with crypto. The question is, how can you manage these risks? Let’s take a look at some strategies;
Risk parity is a strategy that any learned trader will associate with trading legend Ray Dalio. This strategy is simple: You invest all funds into assets that do not correlate, resulting in reducing your funds. So if anything negative occurs with one asset, it doesn’t affect your total investment. With risk parity, you divide your funds into different sectors, which means your gains come from various sources. However, it means as a trader, you have to look out for crypto assets that are not related to returns. This is not an easy task, but if you master the art of risk parity, you will reduce risks.
Cryptocurrency revolves around Bitcoin — the first and most influential currency. When Bitcoin surges up in value, the entire market surges up. If Bitcoin reduces in its value, most other crypto assets will follow suit. This dependence on the market makes it hard for risk parity to be the best risk management method. That’s where decentralized finance steps into the occasion.
Decentralized finance, often abbreviated as DeFi, is essentially another option for the regular crypto market. Fortunately, DeFi also depends totally on the blockchain, so there is no fear. In a decentralized finance system, you don’t need to rely on any bank or broker. Instead, the system utilizes one or more smart contracts to interact with more than one person on the blockchain. A great example of a smart contract-supported crypto is Ethereum.
The decentralized finance system allows flexibility and opportunities. Therefore, there is an opportunity to apply this system in diverse strategies with corresponding risks and rewards. So with this decentralized system, risk parity is a possibility to reduce risks in crypto.
Cryptocurrency is decentralized and doesn’t depend on any regulation or individual. However, the market trends get heavily influenced by the regulations. As a result, one of the most effective ways to reduce risks in crypto will be to mitigate adverse rules. If you remember, the crash of cryptocurrency in May went down heavily because of a Chinese ban on Bitcoin. If these regulations against cryptocurrency begin to support the system, more trust will be generated around the system.