You can LOSE more than you win & still make a profit.
How?
It's all about risk management & profit taking.
But how do you actually do that?
Here is a guide on maximizing reward & minimizing risk in crypto 🧵
How?
It's all about risk management & profit taking.
But how do you actually do that?
Here is a guide on maximizing reward & minimizing risk in crypto 🧵
The bull is no more.
Last year, everyone was winning. You were able to get away with bad planning.
But, that is no longer the case. If you WANT to stay & make it in crypto. You need to have a plan. You need to manage risk.
Let's dive into it.
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Last year, everyone was winning. You were able to get away with bad planning.
But, that is no longer the case. If you WANT to stay & make it in crypto. You need to have a plan. You need to manage risk.
Let's dive into it.
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Emotion vs Reason.
We’re very emotional beings. Everyone knows to priortize reason over emotion.
Yet, we end up falling to FOMO & greed every time.
I used to struggle with knowing when to sell.
As price kept going up, I held cause I was greedy & I got burnt
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We’re very emotional beings. Everyone knows to priortize reason over emotion.
Yet, we end up falling to FOMO & greed every time.
I used to struggle with knowing when to sell.
As price kept going up, I held cause I was greedy & I got burnt
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You need a solid plan.
What helps is to objectively reflect on your risk management habits. And then creating a solid plan.
Making money is great.
But losing money that could’ve been yours, hurts more.
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What helps is to objectively reflect on your risk management habits. And then creating a solid plan.
Making money is great.
But losing money that could’ve been yours, hurts more.
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The three keys to risk management.
At the crux of it, good risk management boils down to a couple of things:
1. Proper allocation
2. Knowing when to sell
3. Managing your emotions
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At the crux of it, good risk management boils down to a couple of things:
1. Proper allocation
2. Knowing when to sell
3. Managing your emotions
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Proper allocation.
Proper allocation starts with:
• your account size
• your risk appetite.
• your goal
If your goal is $1K → $10M, you need to take more risks
If your goal is 4K in passive income with 200K, you can be risk averse
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Proper allocation starts with:
• your account size
• your risk appetite.
• your goal
If your goal is $1K → $10M, you need to take more risks
If your goal is 4K in passive income with 200K, you can be risk averse
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The time period matters.
The more time you have, the more risk averse you can be.
Figure out your risk appetite, that will dictate how you play the game.
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The more time you have, the more risk averse you can be.
Figure out your risk appetite, that will dictate how you play the game.
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Risk brackets.
Break up your portfolio into risk brackets.
For example you decide to put:
• 30% into stablecoins
• 30% into blue chips like ETH and BTC
• 20% into alt L1s like AVAX & LUNA
• 20% into degen ape stuff
Some sample portfolios based on risk appetite. NFA :)
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Break up your portfolio into risk brackets.
For example you decide to put:
• 30% into stablecoins
• 30% into blue chips like ETH and BTC
• 20% into alt L1s like AVAX & LUNA
• 20% into degen ape stuff
Some sample portfolios based on risk appetite. NFA :)
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Critically think about the risk brackets.
Base them on:
• Your income
• Your Age
• How many dependents you have
• Your crypto goal
• Time period
• State of the market
Actually stick these brackets.
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Base them on:
• Your income
• Your Age
• How many dependents you have
• Your crypto goal
• Time period
• State of the market
Actually stick these brackets.
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30% in stables in not sexy.
But, it allows you to:
• Be liquid
• Not lose money in a bad market
• Earn low risk passive income.
Everything goes down in a bad market. Except stablecoins.
You’d rather break even or make a small profit vs lose money.
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But, it allows you to:
• Be liquid
• Not lose money in a bad market
• Earn low risk passive income.
Everything goes down in a bad market. Except stablecoins.
You’d rather break even or make a small profit vs lose money.
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Good risk management comes with discipline.
It’ll be tempting to break your rules. Especially when things are mooning.
I’ve broken them many times, I’ve always gotten rekt. To make it long term, you need to stick to your rules.
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It’ll be tempting to break your rules. Especially when things are mooning.
I’ve broken them many times, I’ve always gotten rekt. To make it long term, you need to stick to your rules.
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Beating ETH
Your benchmark should be a blue chip like ETH.
If you just hold ETH, you’re going to be significantly up over the years.
The only reason you should be trading/investing in something else is if you think you can beat ETH’s returns.
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Your benchmark should be a blue chip like ETH.
If you just hold ETH, you’re going to be significantly up over the years.
The only reason you should be trading/investing in something else is if you think you can beat ETH’s returns.
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Risk vs Reward.
Use the risk vs reward ratio to turn the odds in your favor.
Let's dive into an example.
You find a coin that you think is going to pop off. How much are you looking to make? 10% or 50%?
Set an exit price.
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Use the risk vs reward ratio to turn the odds in your favor.
Let's dive into an example.
You find a coin that you think is going to pop off. How much are you looking to make? 10% or 50%?
Set an exit price.
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Say, you’re aiming for a 10% gain.
How much of your portfolio should you put in?
First refer to your risk brackets. Which risk category does this play fall in?
• Safe play → You can a lot
• Risky → Not more than 1-5%
You do your research & it’s risky.
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How much of your portfolio should you put in?
First refer to your risk brackets. Which risk category does this play fall in?
• Safe play → You can a lot
• Risky → Not more than 1-5%
You do your research & it’s risky.
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You decide to put in 5%
In this case,
The maximum you would lose is 5% ( your entire position).
The max you would gain is 10% ( you sell at a 10% gain)
The risk to reward ratio is 5 (risk) / 10 (reward) = 0.5
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In this case,
The maximum you would lose is 5% ( your entire position).
The max you would gain is 10% ( you sell at a 10% gain)
The risk to reward ratio is 5 (risk) / 10 (reward) = 0.5
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R/R in practice.
Let’s say you face 10 situations where the ratio is 0.5
You start with $1000.
You lose 5% (entire position) on the first 6. You’re left with ~$734
You win the next 4. You’re up to $1072
Despite only being right 4/10 times, you are up $72
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Let’s say you face 10 situations where the ratio is 0.5
You start with $1000.
You lose 5% (entire position) on the first 6. You’re left with ~$734
You win the next 4. You’re up to $1072
Despite only being right 4/10 times, you are up $72
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Benefits of using R/R
With a r/r of 0.5, you only need to be right 1/3 of the time for you to break even.
This is huge.
This is commonly used in trading. But it can used for general investments too.
Do the math, it'll change your life.
academy.binance.com
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With a r/r of 0.5, you only need to be right 1/3 of the time for you to break even.
This is huge.
This is commonly used in trading. But it can used for general investments too.
Do the math, it'll change your life.
academy.binance.com
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Crypto is inherently risky.
Only blue chips (ETH, BTC) & top tier stablecoins are low risk
Not all stablecoins are low risk.
Stablecoins rely on incentives to maintain the peg.
Failure to maintain the peg means your position = 0
Only top tier stablecoins are low risk.
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Only blue chips (ETH, BTC) & top tier stablecoins are low risk
Not all stablecoins are low risk.
Stablecoins rely on incentives to maintain the peg.
Failure to maintain the peg means your position = 0
Only top tier stablecoins are low risk.
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Selling when your risk brackets break
Another good time to sell is when your risk brackets break.
Let’s say you only wanted 20% in Alt L1s.
Alt L1s pump & your portfolio is now 25% alt L1.
It would be a good time to take profits & move it to blue chips.
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Another good time to sell is when your risk brackets break.
Let’s say you only wanted 20% in Alt L1s.
Alt L1s pump & your portfolio is now 25% alt L1.
It would be a good time to take profits & move it to blue chips.
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Make your initial $ back.
For most projects, you want to sell enough to make back your initial entry.
Generally, the only ones to hodl should be blue chips or projects you have incredible conviction in.
A good rule is to take profits to cover initial investments.
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For most projects, you want to sell enough to make back your initial entry.
Generally, the only ones to hodl should be blue chips or projects you have incredible conviction in.
A good rule is to take profits to cover initial investments.
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When do you cover your initial position?
Well, it depends on
• how bullish you are
• how it does compared to ETH
If you want to sell and cover initial investment at 2x, you have to sell 1/2 your position.
If you wait till 4x, you only have to sell 1/4 your position.
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Well, it depends on
• how bullish you are
• how it does compared to ETH
If you want to sell and cover initial investment at 2x, you have to sell 1/2 your position.
If you wait till 4x, you only have to sell 1/4 your position.
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The longer you wait, the greater the risk.
Reflect on your conviction & risk appetite to decide on when you want to sell.
The good thing about this? You're just playing with profit.
You can choose to be riskier.
Even it if it goes to 0, you’re fine.
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Reflect on your conviction & risk appetite to decide on when you want to sell.
The good thing about this? You're just playing with profit.
You can choose to be riskier.
Even it if it goes to 0, you’re fine.
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ETH as a benchmark
A useful benchmark to look is asset vs ETH.
Do you think this asset will significantly outperform ETH?
Think in terms of ETH. Even if your dollar value increases 3x, did it 3x compared to ETH?
If it didn’t, you’re better off holding ETH.
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A useful benchmark to look is asset vs ETH.
Do you think this asset will significantly outperform ETH?
Think in terms of ETH. Even if your dollar value increases 3x, did it 3x compared to ETH?
If it didn’t, you’re better off holding ETH.
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Dollar cost averaging.
Instead of buying a huge chunk of an asset at once, consider dollar cost averaging.
Break up that huge chunk into smaller periodic investments.
This brings the average cost down and increases your return.
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Instead of buying a huge chunk of an asset at once, consider dollar cost averaging.
Break up that huge chunk into smaller periodic investments.
This brings the average cost down and increases your return.
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Bull vs Bear
Your strategies will have to change based on what type market it is.
When its bullish, you can afford to be riskier. You can be more degen
In more uncertain markets like now, I’d primarily move to my blue chips + farming stablecoins
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Your strategies will have to change based on what type market it is.
When its bullish, you can afford to be riskier. You can be more degen
In more uncertain markets like now, I’d primarily move to my blue chips + farming stablecoins
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There’s also a lot of trial & error to it.
As you survive through different cycles, you’ll develop an intuition into what works and doesn’t
But, a solid exit plan + risk management will let you survive and gain that experience.
Learn & adapt as you go.
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As you survive through different cycles, you’ll develop an intuition into what works and doesn’t
But, a solid exit plan + risk management will let you survive and gain that experience.
Learn & adapt as you go.
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You should always have a plan.
@nateliason has some good points on risk management as well
cryptonat.substack.com
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@nateliason has some good points on risk management as well
cryptonat.substack.com
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And that's it. I hope you enjoyed this risk management guide.
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I hope this helped you create a risk management plan.
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