How to reduce losses in cryptocurrency: the main rules

How to reduce losses in cryptocurrency: the main rules

Diversifying the crypto portfolio, reducing the size of positions and other ways to increase the chance of successful trading in digital assets 

Even good trading and investment strategies can lead to portfolio losses if you neglect the basic rules of money management. In addition to the basic rules typical for investing and trading any assets, the crypto space is characterized by a number of additional rules. Let's look at both categories of recommendations.

Content
The key importance of the size of trading positions
How much of the deposit can be allocated for the transaction?
Understanding Diversification for the Crypto Portfolio
The key importance of the size of trading positions
To understand the basics of money management, it is important to repeat the axiom of the market that no analyst's forecast, a paid VIP channel signal or their own analysis can be one hundred percent correct every time, but only represent a greater or lesser probability of events developing in a certain way. Users who keep statistics on their trades may notice that even the best working trading strategy has a certain level of error. For example, if out of ten transactions within the framework of one strategy, nine transactions close in a plus, and one becomes unprofitable, the primary task of the user becomes not to please with excessive or even more so with all capital into such a "pit" of periodically recurring error.

What should I do to prevent this from happening? First, it is recommended to completely eliminate the approach briefly described by the phrase "all in" or "for the whole cutlet". After testing a certain trading strategy on small positions and noticing that it works and makes a profit, users are tempted to open a similar deal for the entire deposit and finally earn properly.

There is a possibility that the transaction opened for the entire deposit will be unsuccessful. Losses on such a transaction will exceed the profits of all previous smaller transactions, and all the work done on the trading strategy will be in vain. At the same time, it does not matter that the transaction opened for the entire deposit may be successful several times. Such random luck, which does not have a well-thought-out trading strategy, will lead users further down the road of delusion, and a large loss will only be a matter of time.

The recommended approach is considered to be a set of positions of the same size within the same strategy. In this case, an unsuccessful transaction ceases to be an event, or even more so a tragedy, but is an expected phenomenon that the user is ready for.

How much of the deposit can be allocated for the transaction?
There is no single answer to this question, since the decision depends on the individual situation for each portfolio, its size and the riskiness of the assets of interest. The following recommendations can be considered as some simplified starting points: for spot trading positions, no more than 1/10 of the portfolio per transaction, for trading positions with leverage, the above value must be reduced by the amount of leverage. Thus, for particularly risky trades with 5-10x and higher leverage, the position size may be as little as 0.5-1% of the user's entire portfolio.

If we are talking about long-term investment, the rule of no more than 1/10 of the portfolio per position will also be true for large altcoins by market capitalization. The only exceptions are the flagships of the BTC and ETH sector, whose share in the portfolio may be significantly higher. The share of small capitalization and new riskier projects in the portfolio should be extremely small, since the crypto space is characterized by an extremely dynamic rotation of technology trends and popular projects.

The service for recording historical values of the market capitalization of blockchain assets helps to clearly understand what can happen to most projects over time. Most of the coins and tokens of the past years, which were once the leaders of the list, will not be familiar to new users at all, being on the "margins" of today's crypto world.

Understanding Diversification for the Crypto Portfolio
One of the approaches to the allocation of portfolio capital is the purchase of a diverse range of assets representing different sectors of decentralized solutions: backbone projects, exchange tokens, projects running on DAG and other blockchain alternatives, decentralized file storage, data and computer capacity markets, DeFi, content platforms and video hosting, DAO, Metaverse and NFT platforms, the Internet of things, decentralized identification, data encryption and many other industries.

It is difficult to call a balanced portfolio containing assets of only one industry, or different industries are represented by projects of the same ecosystem based on the same blockchain. Even a well-diversified set of assets by industry will be risky if they are unnecessarily linked to only one blockchain. If all the user's assets represent one ecosystem, the risk of a fall in the entire portfolio in case of problems with the functioning of the network of the main coin of the ecosystem will increase significantly.

The concept of diversification in the crypto space in the broadest sense of the word refers to many types of diversification: the diversification of technology application sectors, the diversification of blockchains and ecosystems themselves, the diversification of DeFi platforms and centralized exchanges, the diversification of software and hardware working with blockchains and, last but not least, the diversification of cryptocurrency storage methods.