Any investment of funds is associated with a certain share of the risk that, due to some external factors, it will not be possible not only to get at least some profit, but also to keep the original amount. So, for example, it was impossible to predict the outbreak of a large-scale epidemic, due to which production significantly decreased worldwide. On the other hand, competent minimization of risks when placing funds helps to derive some benefit even from such a situation. At the very least, it allows you to stay “with your own people”. And now we will analyze this moment in more detail.
Basic concepts and rules
So, investment risk is the probability of full or partial loss of the invested capital or not receiving the expected profit. However, the analysis can be wrong both upward and downward. Moreover, according to statistics, the first and the second are quite probable events, where much depends on the type of asset. For a cryptocurrency, however, especially such a relatively predictable one as bitcoinbitcoin, positive and negative chances are approximately equal. But people very often think differently due to the connection of psychological mechanisms associated with unjustified expectations.
As for the main rules of competent risk management, they can be reduced to three main points:
- Any placement of funds is accompanied by the possibility of losing these funds. Therefore, of the two projects that promise equal income, it is worth choosing the one in which the chance of negative outcome will be less.
- The higher the yield, the greater the risk. Therefore, rational investors agree to risky projects only if they, in case of success, will bring really large returns.
- The longer the investment period, the higher the risk level. This is a purely statistical pattern - according to the law of large numbers, even a large and stable company has a chance to go bankrupt due to unfortunate coincidence of circumstances.
What does this all mean? Let's look at specific examples. We can cosider, for example, a standard bank deposit. The interest rate was initially calculated to at least cover natural inflation. The term of such a deposit can be very long, and there are practically no risks associated with it. At least technical risks (problems in the work of banks or in the preparation of contracts). Therefore, this contribution is profitable, stable, but not particularly profitable.
On the other hand, there are investments in derivative financial instruments - futures, forwards and the similar. They can be very short-term, mistakes can be made during the drafting of contracts (especially with forward contracts), they are accompanied by great risk, since their profitability directly depends on not always predictable external factors. However, forwards are not available to ordinary investors working with non-deliverable options. Therefore, such investments can either quickly bring a decent profit, or - ruin the unwary investor. And, according to statistics, success in this matter is achieved mostly by professionals who have been working with exchanges for a long time, and not by beginners.
And in the case of cryptocurrency, the situation is much closer to poorly predictable financial instruments than to bank deposits.
Ways to minimize risks
There are several effective strategies that allow, if not completely get rid of losses due to the implementation of investment risks, then at least significantly reduce them.
Diversification. Simply put - do not put all your eggs in one basket, no matter how reliable this basket may seem. For example, Bitcoin is considered the most reliable cryptocurrency. But everyone remembers the "Bitcoin boom", and many also appreciated the significant drop in its rate in March 2020 amid the situation with the epidemic. A rational tactic is to invest not only in bitcoin, but also in several other cryptocurrencies that do not depend on it and are included in the TOP-10 in terms of capitalization.
Hedging. One of the ways to reduce investment risks is through financial mechanisms - futures and other options. For example, when an investor, fearing a serious change in the rate of a certain cryptocurrency, acquires a call option - the right, but not the obligation, to buy it by a certain date at a predetermined price. This allows you to ignore serious fluctuations in rates, but the cost of such financial instruments can significantly reduce the final profit. Which is logical, because as we have already said, the lower the risk, the lower the profitability.
Assessment of liquidity. If the volume of the resource is small, then it will be quite difficult to find a buyer for it in case of increasing value. And any major sale can automatically lead to a significant price reduction. This is typical for many modern projects with altcoins, especially at the early stage of their existence.
Growth potential assessment. The leaders in terms of capitalization have further growth potential, but small. Yes, even in the short term, the price of bitcoin will rise, but we are talking about tens of percent. And some new projects have fantastic potential - over a hundred percent. However, the higher this indicator, the higher the investment risks. Therefore, before financing such projects, you need to carefully analyze the situation - what kind of project is it, what is its purpose, what are the differences from analogs, who is engaged in it. This information will help you more accurately predict possible losses and their consequences.
Staking. One of the forms of diversification of the investment cryptocurrency portfolio. The fact is that in blockchains powered by the PoSPoS consensus algorithm, you can make a profit simply for the fact that you own the cryptocurrency and participate in the functioning of the network. It's simple and relatively reliable. In fact - "passive income", as from bank deposits. And about the same amount - from 5 to 10 percent per year, depending on the project.
Conclusions
A competent investor is well aware that his work is directly associated with risks. He is ready for the fact that he may lose money, but does his best to compensate for these losses at the expense of other projects. This, of course, requires certain skills, knowledge and experience, but the result is worth it.