Risk in the crypto market

What is Risk?

By jimmy09 | James Clarke | 4 Jul 2021


Risk I believe is a subject that has many different interpretations. Some involve complex mathematical formulas, while others involve no more than a simple gut feeling. Of course, I believe each situation requires different measurements of risk and the level of complexity the analysis is undertaken. It makes no sense for a computer program to be run to calculate the risk of driving on the road each day, we just do it regardless of the risk. However, to further this analogy, there is also risk management at play when we are behind the wheel, such as not speeding and looking each way before turning. I am here to help you understand what risk is in regards to crypto markets, and how to manage it.

 

Risk in the stock market

In the stock market there are two main schools that argue about risk- value investors and modern finance theory (MFT) proponents. In the value school, risking permanent capital loss is a cardinal sin, and the downside is protected with extreme vigilance. Qualitative elements are assessed too, such as what the business does and who the founder is. In MFT, the only consideration is volatility which is measured through beta. The lower the beta, the lower the risk. I believe however that this theory is flawed enough in the stock market but even more so in the crypto market where the data is skewered through either wacky markets or simply not enough information.

 

Risk in the crypto market

In the crypto market, there is extreme volatility. Enough volatility I imagine to make Wall Street traders collapse out of anxiety. There are no computer models available (as far as I know) to predict future price movements that use actual mathematics and I don't believe this is possible. In this market, the human factor, along with qualitative elements, are king. We all understand the irrational kneejerk reactions that are prevalent over a news article, and how the integrity of the projects founder can either make it sink or swim. There is no way that these can be put into a computer, and even us humans can struggle with it all. Crypto coins also have the risk of going to zero, very quickly. This is something far rarer in other assets as they are usually backed by something other than intellectual property. One new competitor or an unethical member of the team can spell ruin for a portfolio.

I am not here to unleash some new academic framework for how trading should go, but I do believe I have some valid lessons to teach. One is to pay extreme attention to the projects development. You often aren't buying a coin but instead a piece of a project. Remember this. If you have a strong conviction as to where crypto is going but don't have the know how or time to analyze hundreds of coins, follow MFT and just buy a diversified bunch of coins. This should provide good protection granted you don't buy at the top of a bubble where anything you do is likely to end in disaster. These are just suggestions and should only be taken as that, not advice. 

Holding periods is something that I have also thought about heavily in regards to risk, and it all depends on your understanding of the coin. If you have a strong conviction and back it, then any holding period is alright. If you don't have much of a clue, then I recommend short holding periods but you must have a solid understanding of trading, your not just gambling. Extreme volatility will be experienced so a strong mental attitude is vital

 

I believe that risk is something that can't be overlooked in the world of investing, no matter the asset class, but it can also be managed. Don't let the fear of striking out hold you back from ever taking a swing!

 

Until next time, James Clarke

How do you rate this article?

15


jimmy09
jimmy09

A teenager who is highly interested in the area of cryptocurrency as a future global currency and the technological implications of blockchain.


James Clarke
James Clarke

A teenager who has discovered the world of crypto and has become hooked. I look forward to the future of this exciting technology!

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.