Risk Tolerance: Finding The Right Balance For our Financial Strategy.
Seeing that crypto is a nascent industry. There are many opportunities, such as offering your skills to earn money and investing your money to make more money. However, risk tolerance in crypto is underrated when investing.
To the untrained eyes, it is easy and simple to make money in crypto. You must pick any low-cap coin, put in money and wait for it to blow up.
Crypto doesn’t work that way.
Perhaps you might hit the odd moonshot or two, but that’s not sustainable.
We heard how many people made life-changing money from Shiba Inu, but we didn’t hear about those who lost life-changing money investing in Shiba Inu.
A Brief Report For You.
In crypto, you can win with the worst hand (NFT or degens) or lose with the best hand (BTC, ETH & BNB), which comes down to judgment, timing, and experience.
I don’t expect you to sit down for hours to read the intelligent investor by Benjamin Graham before you can make wise investment decisions in crypto.
I have coined this report to briefly explain how to make a proper crypto investment, handle the risks involved and achieve your financial goal.
After reading this report, you can start investing in crypto wisely, whether you are a newbie or OG who hasn’t made life-changing money in crypto yet.
This report was coined by asking questions from experienced clients, prospects, family, friends, and strangers since the introduction of bitcoin till date.
Effect of Bad Crypto Stories in the Industry.
The bad stories about people losing money in crypto outweigh the success stories. Psychologically, bad news sticks to the brain longer than good news.
If I told you that I made $1,000,000 in Shiba Inu and lost $265,250 in Fantom($FTM), you would remember my losses in detail more than my victory.
Generally speaking, the psychological trauma that comes with these bad stories in the crypto market has had long-term adverse consequences for investors and society.
- It reduces the confidence of investors to invest in good projects.
- Outsiders quickly call out the crypto industry when they hear these stories.
We must acknowledge that people intentionally invest in crypto properly and become successful.
- People bought Solana at $3 and sold it at $150
- People bought AXS below $0.32 and sold at $120.
- People bought Pancakeswap at $0.27 and sold at $38
- People shorter LUNA from $73 to below $1.
I can dedicate this report to sharing people’s success stories you would never hear publicly.
Therefore, instead of focusing on the bad stories and allowing them to affect your confidence to make wise investment decisions, you should learn how the successful ones became successful.
I am talking about acquiring a skill of proper investing if mastered, which would live with you all the days of your life. This skill can be applied in any investment vehicle you can think of; stocks, real estate, hedge funds, etc.
Before making any crypto investment, you must be honest with yourself and answer these questions.
- If your portfolio goes to -64%, how would you feel?
- What are your long-term goals?
- Are you an optimistic or pessimistic investor?
- Do you feel you are an aggressive, moderate, or conservative investor?
I always tell my readers, family, and friends that there are no wrong answers to the above questions.
Every investment has a different risk associated with it. How we handle these risks determines how successful our crypto investment will be.
What is Risk?
Risk is the effect of uncertainty on our objective. Imagine you want to buy bitcoin and hold it for 10 years. What is the uncertainty between you and achieving your objective?
- You could lose your seed phrase.
- Someone could steal your cold wallet.
- The government could place a sanction on bitcoin.
- Bitcoin price may not significantly move upwards.
What is Risk Management in Simple Terms
Risk management involves identifying, analyzing, accepting, or mitigating uncertainty in investment decisions.
Risk management occurs when an investor analyses and attempts to quantify the potential for losses in his crypto investment and then takes the appropriate action given the fund’s investment targets and risk tolerance.
Imagine I was given $1,000 to invest in crypto. Using my risk management skills, I would consider the ROI i am meant to get with these funds and the risk associated with getting it.
5 Risk Management Steps
- Identify the risk
- Analyze the risk
- Prioritize the risk
- Treat the risk
- Monitor the risk
1. Identify the risk
Before you invest in any crypto project, you should be able to identify the risk involved in such a coin.
Different tokens have different risks associated with them. For instance, Ethereum doesn’t have the same risk as newly launched coins. New tokens haven’t established the kind of trust Ethereum has built over the years. They have to earn it.
Bitcoin and Ethereum have different risks. The creator of Ethereum is doxxed. The government can decide to go after Ethereum Creator Vitalik Buterin.
The creator of bitcoin is anonymous, and the government doesn’t know who to hold responsible for halting the system if they want to.
2. Analyse the risk
Now you have identified the risks associated with your investment. The next thing is to analyze these risks.
- How likely are these risks to happen? For instance, What is the possibility of the government going after the Ethereum creator?
- If they happen, what will the consequences look like?
- Will my loss affect my daily life?
3. Prioritise the risk
After analyzing the risk, rank each risk by
- Its potential impact on the project.
- The possibility of happening
It will help you identify useful solutions for each risk.
4. Solve the risk
We cannot see all the risks in a crypto project, but the more we see and solve, the more chances we will have of having a successful investment outcome.
If many investors understood the risk involved when Do Kwon, Co-founder, and CEO of Terraform Labs, wanted to create an algorithmic stablecoin, they would have sold a part of their $LUNA token before the price crashed.
5. Monitor the risk
After following these four risk processes, it doesn’t end there.
You have to follow the founders of the projects you invested in. This allows you to get real-time information about what is happening in the project and make a quick and informed decision.
In April 2022, when Andre Cronje decided to quit decentralized finance, it affected the price of all the crypto projects he was associated with. Andre Cronje was known to be the father of decentralized finance. He was associated with the following;
- Sushiswap ($SUSHI)
If you weren’t monitoring the social media of Andre Cronje, you wouldn’t have been among the first set of people that sold off immediately when he tweeted it. The tweet that gave an insight into the industry he was leaving has been deleted.
What is Risk Tolerance in Crypto?
Cryptocurrencies are becoming increasingly popular as an investment vehicle. Therefore, investors should be aware of their different risk tolerance levels.
Risk tolerance can be defined as an individual’s ability to accept risk in exchange for the potential of higher returns.
Generally speaking, there are three levels of risk tolerance when it comes to cryptocurrency investing:
Conservative Risk Tolerance
Conservative investors tend to be more risk-averse and are more likely to stick to safer investments.
They are also known to have a low tolerance for risk. This investor typically looks for lower returns but with minimal risk.
They can apply different strategies to keep their money safe with a potential return by having one or several options.
- A bitcoin maximalist goes 100% into bitcoin and doesn’t care about every other cryptocurrency or anything happening with other cryptocurrencies.
- An Ethereum maximalist is the same with bitcoin maximalist
- A Binance token maximalist goes 100% in BNB
- You can divide your portfolio equally invested into these blue chip assets(BNB, BTC & ETH). For instance, 33% in BTC, 33% in ETH, and 34% in BNB.
Blue-chip assets have a proven track record, have survived several bear and bull cycles, increased the wealth of their investors, and have long-term growth.
It’s generally a good idea to diversify your investment portfolio across a range of assets to spread risk and potentially maximize returns. I will go into more detail about diversification below.
Moderate Risk Tolerance
Moderate risk tolerance is a middle ground between conservative and aggressive investing. Also known as medium risk takers. Investors with moderate risk tolerance may choose to invest in cryptocurrencies with a higher risk profile and the potential for higher returns.
These investors may choose to invest in altcoins — alternative coins to bitcoin. Altcoins generally have higher volatility but can offer higher returns if the price of the coin rises significantly.
Moderate risk takers use any of these strategies.
- 50% in blue-chip assets
- 50% in degen/shitcoins( high risk)
- 50% in blue-chip assets
- 25% in low-risk assets
- 25% in degens/shitcoins
This strategy is called the barbell strategy. Playing two extreme ends. Extremely safe and extremely risky. if the risky investments fail, the blue-chip investments will compensate for the losses.
Aggressive Risk Tolerance
Investors with aggressive risk tolerance are willing to take on higher levels of risk in exchange for potentially higher returns. These investors typically choose to invest in “riskier” cryptocurrencies such as Initial Coin Offerings (ICOs) and degens, new coins that have yet to establish a track record.
ICOs come with significant risks due to their lack of regulation and potential for scams. Investors with aggressive risk tolerance may also choose to invest in smaller altcoins that are highly volatile and could offer high returns if the price of the coin rises significantly.
This type of investor must thoroughly research and carefully evaluate each investment’s potential risks and rewards before deciding.
A typical aggressive investor would choose one of these options.
- 1. 25% in blue-chip assets
- 25% on low risk coins(ALGO, ATOM, STX)
- 50% in high-risk coins
- 2. 20% in low-risk coins
- 80% in high-risk coins.
- 100% in high-risk coins.
One of the problems with aggressive risk tolerance investors is that they don’t know when to go defensive and lock in the profits they’ve made.
When things are going great, it is tempting to be more aggressive. My point is this, while you’re aggressive, learn to lock in profits when you see one. People who made aggressive investments into Shibainu, Flow, AXS, etc., would have lost all they made if they didn’t take a profit.
It is important to understand your risk tolerance level before investing. Your risk tolerance should be based on your financial goals, time horizon, and financial situation.
Once you understand your risk tolerance level, you can determine the types of investments suitable for your temperament.
How Long-Term Investors Should Approach Crypto Investment During Bear and Bull Markets.
Some investors buy 10 BTC and leave it in the next 10 years. I would advocate for a strategy other than this.
We have bull and bear cycles in crypto. Would you prefer to sell at the peak of every bull run, wait and buy more quantity during the bear cycle?
You don’t need to invest new money. You have to keep increasing your BTC.
If I bought 10 BTC during the bear market and held it for the next 10 years, it remains 10 BTC. If I bought 10 BTC during the bear market, sold at the bull cycle’s peak, and kept doing this for every bear and bull cycle, I would have more BTC than the person that bought and held for 10 straight years. Goerge Soros used this strategy to build his wealth.
It is difficult to identify the peak of the market. You can use several indicators(technical and fundamental) to get an insight into the situation of the market.
The fundamental rule to follow is the moment the majority of the people are optimistic about the crypto market, and few people are being logical, it is time to sell half of your holdings to USDT.
Time Horizon and Age
Time horizon is the time an investor expects to hold onto an investment. This time frame varies depending on the individual investor’s goals, risk tolerance, and financial situation.
Generally speaking, younger investors have a longer investment horizon, as they have more time to ride out potential market fluctuations and can take on more risk in pursuit of higher returns.
On the other hand, older investors have a shorter investment time horizon and are more focused on preserving their wealth and steady income from their investments.
Investors need to consider their investment time horizon when making decisions about their investments, as it can help them to choose the right mix of assets for their particular situation.
Using the bear and bull cycle strategy mentioned above, you will care very little about the time horizon before making your crypto investment.
Best Practices for Risk Investment.
It is difficult to predict every risk that can happen. But there are some best practices you can use to help you protect your capital and investment.
1. Always take profits: Whenever a coin does more than 2x, remove your capital and some profit and leave the rest to ride the uptrend. Removing your capital means converting it to USDT.
2. Only invest what you are willing to lose.
3. Do not borrow money to invest.
4. Beware of adding additional risks to your investments. Projects that have founders with questionable histories should be avoided. If they did it previously, they could do it again when push comes to shove.
5. Know when to cut your losses and move on. If your investment is down by 20%, it can go down by another 30%.
6. Timing matters a lot. Time in the market beats timing the market. Crypto investing is 40% patience, 40% discipline, and 20% research. Avoid FOMO. When you enter a potential coin early, you have an edge in the market.
7. Diversify your portfolio. Invest in different potential projects. Invest in potential projects in the Atom ecosystem, Ethereum Ecosystem, BNB ecosystem, etc. Do not pick only potential projects under the Ethereum ecosystem. If one ecosystem fails to pump, the other ecosystem that is pumped will cover it.
I also do not mean you should spread your money so thin. I see portfolios with 20–30 coins. It isn’t easy to keep track of the activities of these coins, or else you have a team. Instead, have about 7–12 coins and invest more funds in them to reap reasonable results when they moon.
8. Think long-term. All the books I have studied about investment always mention long-term strategy. The problem with some investors is that they want to become rich in less than a year. They take on more risk than their portfolio balance should, and they’ve been liquidated from the market when something goes wrong. Good things take time. Invest Wisely and allow the blockchain projects you invested in to complete their good product and start marketing it.
9. Have a plan. You cannot talk about investment risk if you don’t have a plan for your investment. Follow this process.
- Make a plan
- Write it down
- Resolve to stick to it so you don’t panic sell when the market tanks.
If you do not have a plan, you will buy many useless coins recommended by Crypto Twitter and influencers.
I don’t buy any coin recommended by an influencer. Chances are that I will be used as exit liquidity.
I am usually not interested if I don’t have the opportunity to buy a coin before it gets caught up with the hype.
Every day you face different kinds of risks. You could get sacked from your job, step outside your house, get hit by a stray bullet or accident, etc. Life itself is a risk. The earlier we face these risks, the better for us.
One of the lessons I learned from Rich Dad, Poor Dad by Robert Kiyosaki is that you shouldn’t miss opportunities because of the risk involved. Instead, seek ways to handle these risks, reduce them to the bare minimum, and make money from them. Everyone is avoiding making that investment because it is risky.
Most times, these risks that we are afraid of may never happen. Imagine not investing in XVG, Dogecoin, Shibainu, etc., because you feared they had no use cases.
I need you to understand this. Blockchain projects are more likely to keep existing until it pumps or until the bull cycle is over.
Disclaimer: This is not financial advice. This post was made for educational purposes. Consult your financial adviser before taking action.