How to Protect Yourself When Trading was written by FlatOutCrypto, and it’s included in issue #10 of 21Cryptos Magazine. To read more articles like this subscribe today. To read other free articles check out our Magazine category. Follow us on Instagram, Facebook and LinkedIn.
This article is from an earlier date and as such can contain figures that were actual at time of writing.
Every crypto crash brings with it tales of woe, those who have lost it all trading. There are a number of similarities across most of these stories.
The most frequent mistake is that people over-leverage in an attempt to make more profits. They take out loans or buy crypto on credit cards, or they leverage themselves up on exchanges which allow them to buy 100x the amount of crypto than the collateral they put up. When they lose, they are forced to repay the full amount.
As with poker, bankroll management is key to avoiding losing everything.
One of the most important lessons to be learned is that remaining solvent has to be prioritised at all costs. You will always face unexpected events and need to remain in the market long enough to give your investments time to appreciate. You can’t make money when you have no money.
Furthermore, when rapid appreciation does happen, it’s important to make sure you take profits. When to do so depends upon your risk appetite, but it is important to have a plan as to when and how much profits you will take.
Doing so provides protection against a downturn, but it also allows you to take profits on the principal you invested originally and therefore leave you with pure upside on what is left. This plan helps in other ways. Having preset limits at which you will cash out takes the emotion of trading in volatile markets. The other benefit of this is that it provides reserves with which to buy back in the case of a market dip.
Patience & Other Attributes
Another key attribute to learn is simply patience. It is easy to get dragged into the ‘FOMO’ of a global asset class on the rise, but many cryptoassets have now hit not just 1Y lows, but in some cases 5Y lows.
Having the ability to recognise a market which is overvalued is only useful if accompanied by the wherewithal to wait it out until prices drop. So too is waiting to buy back in until a reversal has been confirmed. Those who bought BTC following a 50% drop are now down nearly 66% themselves. Timing the bottom is difficult.
There are other, smaller things you can do to protect yourself when trading, too. Simply taking the time to put in buy/sell orders rather than selling at market price can net an extra 1-5% in many cases in crypto, such is the lack of liquidity of many tokens. Furthermore, users should not trust service providers such as exchanges to safely hold their tokens – there have been too many hacks and lost user funds proving otherwise.
Finally, users should be honest with themselves if they should actually be trading at all. It is not for everyone and there is no shame in simply buying and holding. For many, trading cryptoassets is actually pure gambling. As with any form of gambling, the odds are stacked against you – arguably more so in crypto as a result of manipulation and the lack of regulation.