The cryptocurrency space has made a lot of people rich and poor based on their risk management, and it's important to note that the space is very volatile but your ability to assess, analyze, and mitigate risk can keep you profitable.

If you agree that the space comes with a high level of risk, you must learn how to improve and work on your risk management following these 7 steps in this article.

What is Risk Management?

There are a lot of definitions but I will make this easy and straight to the point.

Risk management is like wearing a seatbelt while driving – it's just a way to protect yourself.

In the Cryptocurrency space, it means making smart choices to handle the ups and downs in the value of your investments. Just as a seatbelt may not prevent a crash, it reduces the impact of a car crash, and good risk management minimizes the impact of potential losses on your portfolio. It's about being prepared and making decisions that keep you safe on your financial journey in the world of cryptocurrencies.

Why Is Risk Management Important?

If you are looking to make and preserve profit over time in the Cryptocurrency space, especially as a beginner, you must practice good risk management for the following reasons.

1. Goal Alignment: The only way to stay on track is by making decisions that align with your financial goals, so you are not just investing to make money but to meet a specific target.

2. Asset Allocation: knowing how to spread your portfolio across different assets so that when one coin performs badly, you can balance it with profit from other assets.

3. Risk Assessment: the continuous monitoring and identification of risk factors and trying to avoid or manage them.

4. Emotional Discipline: Managing greed, fear, anger, revenge, hope, excitement, and other emotions that play out when you are either winning or losing can be a lot easier with a good risk management plan.

5. Peace Of Mind: Its important to prioritize your mental health and that can only be done when you are not risking too much of your investment.

The need for risk management can not be overemphasized, especially for newbies, and here are five ways to improve your risk management.

7 Steps To Improve Your Risk Management

Risk management is a journey, and it is not just for newbies but for everyone looking to make money and remain profitable in this space in the long run.

The following will help you improve your risk management

1. Understand Your Risk Tolerance:

Risk tolerance refers to your willingness and ability to endure fluctuations in the value of your investments or to accept the potential for loss in pursuit of potential returns.

It is important to make peace with the fact that you may lose money while trying to make money and understand how you will feel seeing your portfolio on a draw-down.

How much in percentage are you willing to lose to call it a day, some people chase the market for revenge after losing an amount that is above their risk tolerance or even go as far as transferring aggression on friends and family. Before investing in the cryptocurrency space, you must assess your psychological and emotional comfort with taking risks and evaluate your financial capacity to absorb losses. Someone with ample financial resources may have a higher ability to take on risk than those hoping to address certain financial challenges with their target profit.

2. Risk What You Can Afford To Lose:

It is one thing to know your risk tolerance, respecting it is another ball game. Allocate risk based on your risk tolerance and only invest what you can afford to lose.

If you have a low-risk tolerance, you may invest in the spot market and buy assets with good use cases, strong and active communities with promising futures and already listed in reputable exchanges, and if you love high risk, then the futures market will not be a bad investment choice or very low market capitalization assets that are yet to be listed in major exchanges with promising 5000x or more reward. Never risk an amount that will drive your peace of mind away, don't even borrow to invest or use money entrusted to you to invest in a volatile market.

3. Learn How To Control Your Emotions:

It is nearly impossible to separate emotions from investments because we tend to get emotionally involved whenever money is at stake.

Regardless, more money has been lost to emotional investment decisions than numbers can count.

Even with the right trading and investment knowledge, investors and traders lose money whenever they let greed, fear, hope, excitement, confidence, and anger cloud their judgment.

For example, having a $30,000 target and seeing a reversal in price at $27,000 profit, Hope will make you believe that there will be a bounce back somewhere that will push the price back to your $30,000 target and you may end up watching your realized profit go down the drain because the fear of missing out stopped you from taking a partial profit.

4. Use Risk Management tools:

There are tools on most exchanges and investment platforms that can be used to limit and manage risk and it's important to use them.

Some of these tools are a position size calculator, stop loss, trailing stops, price alerts, take profit, and more.

Beginners often neglect the use of these tools as they are rather focused on their target profit.

5. Use Good Risk To Reward and small Leverage:

Risking ten percent of a portfolio for a five percent reward is no way to grow your portfolio.

The reward on every investment must be worth the risk to avoid losing money over a small reward.

Many beginners are quick to try out margin trading where the temptation of trying out 100x leverage is difficult to overcome because of the promising reward.

While higher leverage assures you more profit, you can lose your entire portfolio if the market goes against your direction in a matter of minutes.

An understanding of risk tolerance and control of greed and fear will also help you in making better risk-to-reward decisions.

6. Think Long-term and have an Investment plan:

We have seen people come into the space and fade away after a short while and part of the things responsible for this was the absence of an investment plan.

It is important to have a realistic trading and investing plan that rightly defines how you intend to manage risk, take profit, pay yourself, and diversify your investment within a specified time range.

Short-term thinkers are often controlled by fear of missing out (FOMC) and greed, so they will go against all the above risk management steps and fix their minds only on winning without giving due consideration to the reality of losing.

An eight percent monthly profit target is small when you are not thinking long-term or compound interest.

7. Use Cold Storage For Your Assets:

The popular saying "Not your keys, not your coins" implies that storing your assets in centralized exchanges can also present a level of risk, like hacking, crashing of the site, or even bankruptcy as we witnessed with FTX in November 2022.

Your private keys are in the hands of centralized exchanges and your hard-earned money can be affected if they are forced to shut down for any reason.

It is important to note that your assets can also be compromised due to holder carelessness because anything connected to the internet is vulnerable to hacking and cybercriminals are getting creative at the dawn of each day.

Hence, moving assets to a cold storage device is on this list because it has no active connection to the internet and is decentralized.

Conclusion

Cryptocurrencies are volatile and you stand a better chance of being profitable when you follow these 7 steps to improve your risk management and continuously assess yourself and your portfolio, counting every loss as a lesson and thinking long term.