The cryptocurrency market differs from the rest by excessive volatility, which is due to its mode of operation (24×7), ongoing institutionalization and the actual absence of clear investment guidelines characteristic of traditional markets today. You can also add increased leverage in the derivatives market, which can lead to mass liquidations with increased price shocks.
Those who enter the digital asset space without understanding this nature will inevitably face significant losses. Below are tips on how to dramatically reduce the chances of such a scenario.
Not the last money
This is a classic rule for all participants of any markets. The market allows you to save savings from inflation, but in order for it to bring regular income and allow you not to rely on outside income, you will need to go a difficult way.
It’s like in sports. In the national teams and at the Olympics – only the chosen ones. Successful traders are also a select cohort. The vast majority will fail. Therefore, there is no need to build pictures of a bright future. This is painstaking and difficult work and significant time costs.
Investments in cryptocurrencies can also pose a risk that is not comparable to expectations. During its thirteen-year history, bitcoin has experienced five bear markets, within which it lost up to 90% in value.
Other cryptocurrencies could completely lose their value. A fresh example is LUNA and the algorithmic stablecoin Terra USD based on this asset, which collapsed in May of this year. The first one was in the top 10 cryptocurrencies. Many experts recommend investing no more than 5% of the capital of your portfolio. But it all depends on the individual characteristics of a particular market participant.
Leverage wisely
In this case, we are talking about leverage in the crypto derivatives market. It’s like forex, only “cooler”. Changes in exchange rates for the day rarely exceed 1%. With a standard leverage of 100x– this is 2x or zeroing the account. In the cryptocurrency market, leading exchanges offer shoulders of 25x (they can be increased up to 125x, a real extreme!), but cryptocurrencies can show double-digit growth or decline in a day.
What does this mean? That you can hit the jackpot or “stay without pants” in a matter of minutes! For example, the unexpected weakening of inflation in the US in the report on August 10 in just three minutes threw up the Ethereum rate by 4.4%! (The growth on this day was 8.9%.) Multiply by shoulders and draw conclusions!
Investing, not speculation
This advice follows from the previous one. Not everyone can successfully get away with it after such a “roller coaster”. Even using small leverage for speculation without a trading system and discipline is the way to reset the deposit. Therefore, for many in the cryptocurrency market, the only strategy remains HODL (in slang from HOLD – to hold).
You can use the tactics of averaging the cost. If you are very far from understanding how financial markets work and how to determine cycles. Everyone who was guided by these principles became wealthy people.
It is important to make a reservation — we are talking about buying bitcoin and Ethereum, the example with LUNA above is indicative, and this will be discussed below. Both of these assets do not have an inflationary nature (the first has an issue limit set, the second has introduced a burning mechanism), which, against the background of further popularization of cryptocurrencies (by 2025, the number of users will exceed 1 billion – BCG forecast), will lead to new records on the horizon of the coming years.
Diversification
The example of LUNA and Terra USD is far from the only one. There are many assets on the cryptocurrency market that will become part of history in the future, dead-end branches of evolution. In order not to fall into a drawdown and not be left with a depreciated asset, you need to remember about diversification – not to put all your eggs in one basket. It is just as important here as in any other markets.
DYOR
This abbreviation hides the expression Do Your Own Research. Or “do your own research.” This is relevant in the case of investments in crypto assets other than bitcoin and Ethereum.
Among them there are those who can occupy their own unique niche. For example, MATIC (Polygon project), which develops a network of second-level solutions on top of Ethereum. Although ambiguous due to technical problems, but potentially entrenched in the status of a competitor to Ethereum – Solana or NEAR, which was recognized in this status by the co-founder of the second largest cryptocurrency, Vitalik Buterin.
But you need to rely only on yourself in investment decisions. The Terra c LUNA and Terra USD ecosystem, which made a splash at the beginning of the year and then disappeared as quickly as a supernova, was advertised by many well-known people in the industry. Many could take advantage of their advice, and now they only have to blame themselves.