An Insider's Thoughts on Crypto Risk Management

Are you managing your risk when it comes to cryptocurrency investing and trading? We've put together some Insider thoughts to predict, control, and avoid losses when doing so.

While it is true that investing in cryptocurrencies can be riskier than investing in traditional securities, you can't just take the investment risks of one asset class and compare them to another. The fact is, crypto assets and traditional securities are entirely different animals and should be evaluated separately.

Speculation Reigns

There is always an element of risk when investing in securities that are considered to be speculative. These types of investments could result in a loss of interest, principal, or both. Many investors choose to avoid these high-risk securities, but it's impossible to predict the outcome of any speculative investment. It could just as easily lead to a gain as it does to a loss.

For example, high-yield bonds - which are also called junk bonds - are more likely to default than other types of bonds. In the late-1980s, when junk bonds were at their peak, these debt instruments were called “speculative-grade” or “below-investment-grade” bonds. In addition to their low credit ratings, many issuers of high-yield bonds were in various stages of bankruptcy.

If you invested in a firm that emerged from bankruptcy, you could have made a lot of money. However, it would have been difficult to do and many investors ended up losing their capital. The uncertainty of investing in a junk bond, even with the use of traditional investment analytical tools — like company history, financials, performance metrics, and market trends — is what made them speculative.

Change Happens Quickly In Crypto

Cryptocurrency trading is speculative, and the returns can be high, as seen with Bitcoin's value increasing from $10,000 to $20,000 USD in less than two weeks in December 2017. It's important to note that cryptocurrency risk management is different from how high-yield bonds are risky. With that in mind, it's still crucial to managing crypto risks.

Cryptocurrency is a tough asset class to pin down. For example, the IRS currently views crypto as property and taxes it as capital gains and the SEC believes it’s a security that should be subject to the SEC’s regulations. So, when the very essence of a thing is in question from a regulatory perspective, then it’s easy to default to calling it “risky.” Accordingly, it makes sense to approach cryptocurrency with a degree of caution, as well as excitement.

It Is Your Choice

Speculative risk-taking is a choice that you make after doing your research and understanding both the risks and rewards. It's important to remember that investing is not the same as gambling, and you should never gamble with your money. Make sure to study the assets you're interested in, get to know the risks, and learn about the exchanges where you can trade.

When it comes to investing in crypto or creating a risk management process for crypto, here are some factors to keep in mind:- The market is highly volatile, so your investment could lose value quickly- There's a lack of regulation, which could lead to fraud or other problems- You may not have the same protections as you would with traditional investments.

The digital asset market is known for its volatility, where prices can range from extremely high to low within the span of a single day. This volatility seems to be unpredictable, so it's crucial to be cautious when investing in this market. Before investing, have a plan and decide how much you're willing to spend on cryptocurrency according to your budget.

Depending on who you talk to, the crypto market's lack of a centralized regulatory entity may or may not pose an investment risk. Some believe that the lack of regulation makes crypto risky, while others feel that the advent of more regulations could stifle innovation in the sector.

As the cryptocurrency industry evolves, so too does the regulation surrounding it. This can create some risks, such as consumer protection, unclear legal venues for disputes, and a general lack of clarity about what investors and exchanges can and cannot do. However, most market participants believe that standardized regulatory controls are necessary for the industry to continue to grow.

Don't Forget, It's A New Class

The more important issue when it comes to developing a risk-management strategy for crypto is that traditional financial concepts should not be blindly applied to this new asset class. While assets in crypto may be speculative, there is growing knowledge that the technology, networks, and assets themselves have value. Defining and measuring this value is an ongoing process that will shape how investors perceive the risks of investing in crypto.