Explore the idea of cryptocurrency
Unlike traditional money, which is used mainly for payments, savings and investment, the functionality of crypto projects (which issue tokens) are wider. The methods of applying the blockchain technology are as follows:
• SMART contracts (NEO, Qtum, Ethereum);
• Decentralized exchange platforms (BitShares, Waves);
• Decentralized networks for file exchange (Storj, Filecoin);
Blockchain based projects, networks and communities (STEEM, LINK, ICON, Telegram)
Now blockchain technology is used mainly for described projects, but in nearest future, enthusiasts will find the blockchain and other uses, but so far this technology is used mainly for the described purposes.
Why is it important for an investor? The fact is that the cost of a cryptocurrency is determined by its utility. If there is something useful for a person in the system in which tokens function (for example, in Ethereum this is an opportunity to conclude a guaranteed “smart” contract), then its cryptocurrency will always be in value. Conversely, “dummy projects” are not suitable for long-term investment: as soon as the community realizes that there is nothing worthwhile in development, the rate of tokens will rush down to zero. Before investing in a cryptocurrency, examine its ecosystem and answer the questions:
• Does it bring real benefits?
• When will the final result appear?
• How realistic is it to achieve all the goals set by developers?
• Does the qualification and experience of the project ideologists allow reaching the end?
If all the answers are positive, then investing in cryptocurrency is associated with minimal risks – the system is useful for the community, will become popular, and demand will be formed for its tokens. With negative answers, it is better to choose another project, the benefit in the field of cryptocurrency is now hundreds, if not thousands.
How liquid the cryptocurrency is?
A trader with experience in working with cryptocurrencies understands that the state of bitcoin billionaires that the media are trumpeting does not really exist. Just because if they suddenly decide to sell all their tokens, the market will take it as a panic. At best, the course will seriously decline, and at worst, it will drop to minimals.
For successful trading, it is important that there is always something to buy and what to sell. In other words, sufficient liquidity must be ensured. With small trading volumes in cryptocurrency, there is a risk of lack of supply (if you want to buy it) or demand (if you need to sell). Because of this, you can stay with a large number of tokens at a good rate, but the inability to convert them to other currencies. And the benefits of such an asset – zero.
This risk is relevant precisely in the trading of cryptocurrency. In 2018, the number of altcoins exceeded three thousand. But even experienced investors know at best about 50-70 types of tokens, having no idea about the others. Investment tools in the traditional market are much smaller, and they are more popular, so you will not have to face the absence of a buyer or seller.
In order not to suffer damage due to low liquidity of cryptocurrency, trade only popular tokens. View statistics on the site CoinMarketCap. To avoid incurring damage due to the low liquidity of the cryptocurrency, trade only popular tokens. View statistics on the site CoinMarketCap. If you use this resource, then divide the value from the “Volume (24h)” column by the number in the “Market Cap” field. If the value obtained is greater than 0.01, then the risk of reduced liquidity is minimal.
Diversification is a risk hedging method used in dealing with any assets. For cryptocurrency, it is no less relevant than for investing, for example, in futures or CFD contracts.
In the case of cryptocurrencies, the advice “not to store all eggs in one basket” is true, but does not reflect the essence of this market. Even if you choose not one or two, but four or five types of tokens, then you will not be able to reduce the risk of losing funds to an acceptable level. At least 10-15 cryptocurrencies must be chosen in order to protect themselves from shocks and crashes of individual projects.
Bitcoin and Ethereum are giants of the world of cryptocurrencies, known even to those who have never worked with the digital money market. Only the enthusiasts know about the rest of the projects (with the exception of another 4-5 out of the top ten), and they can disappear at any moment. To reduce the damage from probable collapse to zero, distribute the capital into 2-3 dozen tokens.
However, the diversification of a cryptocurrency portfolio does not provide complete security. This is due to the fact that digital money, as a rule, either grows together or falls all together. Using only this method of hedging risks will not make them minimal and does not guarantee that all funds will not be lost as a result of a market crash.
Use minimal leverage
Trading with leverage has appeared on cryptocurrency exchanges relatively recently. But it was already experienced by many traders, and with varying success – someone earned good money, and someone broke up with capital entirely. This way of trading can give you a huge profit, but in this case risks are very high. If you are beginner at crypto trading and not sure in your actions. Better to use trading bots, which have stop-system and profit-loss control. Everice Bot for trading developed to be multifunctional adaptive algorithm with automatically changed trading strategy.
For the Forex market, investors are familiar with leverage values of 1: 200, 1: 500 and even 1: 1000. There is no such possibilities in crypto trading: the maximum that the exchanges allow is 1:100 (Bitfinex), more often the platforms are limited to levels of 1: 3 or 1: 10.
The volatility of the market for digital currencies in comparison with the trading of traditional investment instruments is not so much higher than orders of magnitude.
The optimal leverage in token trading is 1: 3. On the one hand, it reduces the risk of total loss of funds to a minimum – 33% corrections occur less frequently during one session. On the other hand, it allows you to get increased profits:
• if a trader enters the stock exchange and has $ 100, then upon receiving another $ 300 loan (1: 3 leverage allows it), then when the price of cryptocurrency rises by 10% per day, its net profit is $ 40;
• if a trader enters the stock exchange with $ 100 but does not borrow money, then with a 10% increase during the day, the profit will be only $ 10.
Thus, a leverage of 1: 3 gives a chance to increase the profitability of trade by 4 times, minimizing the risk of complete loss of funds.
Work with news is a must
The news is an important factor in the trading of an asset. But if their influence on the quotes of traditional instruments is simply significant, then in the cryptocurrency trade it is very significant.
This is due to the fact that so far in the world of digital money, no source of information has proven to be truly reliable. Investors do not know what to believe, and the market reacts to any informational channels. Even those that are insignificant are published on social networks and end up being “duck”.
Since any news can potentially affect a cryptocurrency rate, you must constantly monitor them and react in time. Social networks of project developers, cryptocurrency enthusiasts, media – these sources need to be constantly updated and read the latest news. When the material is only published, there is time to buy an asset or get rid of it as soon as possible. But in 5-10 minutes it will be too late: traders will understand that something has happened, and a powerful correction will begin in the market.
Cryptocurrency trading has its own characteristics and, in general, differs significantly from investing in more traditional instruments. It is much easier to put together a fortune in 2-3 months, but it is also very easy to lose all the money within in a very short period of time.
Risk management for the cryptocurrency market is relevant in the same way as in any other investment. Only an investor who calculates all the risks in advance reduces them and consciously accepts them will succeed in the long term.
Risk management cryptocurrency is based on the same principles as hedging risks in other markets but has several features. In particular, experts recommend paying more attention to trading platforms, significantly diversifying the portfolio and taking a look at each cryptocurrency separately.
Risk management in cryptocurrencies will not allow getting the maximum profit. He has another task – to make income stable and possible in all situations. Using risk management cryptocurrency in practice, you do not get a quick income on the “HYPE”. But do not lose all the money, unsuccessfully investing in an asset that has no idea and future.
Artem Kazanowski, CEO Evericebot.com
Daria Pomazanova, CMO Evericelabs.com