In less than a decade, cryptocurrencies have exploded onto the scene and significantly changed the way we think about money and investments. Where in the past, Bitcoin was written off as being just a passing fad, it has quickly grown into something else entirely, faster than a horse in the Kentucky Derby. What was once the domain of dark web users and even criminals, has become one of the hottest investments of the 21st century.
Loved and hated in equal measures, crypto-assets can be an extremely risky proposition due to its unregulated nature. However, the massive risks have paid off spectacularly for a few very lucky individuals. It is this fad that has provided investors with an incentive to snap up any and all kinds of cryptocurrencies wherever possible.
Despite having hit highs of $10,000 and above in 2019, it would appear that things are nowhere near as rosy at the time of writing with prices sliding continually downwards.
Experts have remarked that a combination of market pessimism caused by Mark Zuckerberg’s underwhelming congress performance and developments in Google’s quantum computing research have renewed fears that Bitcoin mining would be changed irrevocably.
With all of that in mind, the question has to be asked, what does the future of cryptocurrency look like? And how can investors manage their risk? Join us as we take a look at how you can protect your crypto portfolio.
- Diversifying your crypto portfolio
It’s no secret that crypto-based assets are extremely volatile. In just a matter of moments, prices can fluctuate by as much as 150% with little or no warning. Such high levels of volatility mean that fortunes can be made or lost in just a blink of an eye.
Hence, one of the simplest and most effective ways of managing your risk is by diversifying your investments. While Bitcoin is without a doubt the mainstay of many portfolios, it is by no means the only investment available to you. From Ethereum to Ripple, there are dozens of reputable coins on the market that you can choose to purchase.
When planning out your crypto portfolio, it’s best to opt for a healthy mix of assets. Ideally, your portfolio should consist of a backbone of stablecoins and a sprinkling or riskier assets. Splitting up investments into different types of coins ensures that in the long-term, your portfolio will not be wiped out by a single catastrophic event.
While the returns may be slightly lower when compared to investing in riskier coins, your risk exposure is significantly reduced.
-
Short selling assets
Short selling is an investment strategy that can be used as a means of hedging your assets. For example, you take a short-selling position by borrowing a digital asset such as Bitcoin from any of the crypto exchanges. You then sell the Bitcoin at the current market price to a willing buyer and repurchase it at a lower price before having to return it to the exchange.
From here, you’ll be able to earn a profit on the difference in prices. Short selling is a complicated hedging maneuver used by investors when they expect the price of a said commodity to fall in the near future. This allows them to sell borrowed cryptocurrency at a higher price while repaying it a lower rate when the price falls.
This strategy is not without its fair share of risk as theoretically speaking, the price of cryptocurrency can suddenly increase without any warning which forces you to take a loss. On the other hand, being able to correctly predict a sudden fall in prices not only hedges your risk but returns a healthy profit.
-
Utilize derivatives
Being a widely traded commodity, dozens of crypto exchanges offer derivatives which are a great way of managing one’s risk. If you didn’t know, derivatives are defined as financial instruments that derive (hence the name) their values from the price of an underlying asset.
Common derivatives include contracts, options, futures and swaps. Take futures as an example, they are essentially an agreement between two parties to buy or sell a particular commodity at a fixed price at some point in the future.
Derivatives are especially useful in the world of cryptocurrency trading. Due to the extreme volatility of cryptocurrencies, derivatives allow an investor to exercise some degree of control over the buy/sell price of their crypto assets thus reducing their risk exposure.
Investing in cryptocurrencies is a risky proposition that can either make or break you. Always remember that it’s best to stay up to date with current affairs in order to avoid getting blindsided.
