Even good crypto trading signals and investment strategies can lead to portfolio losses if the basic rules of money management are neglected. In addition to the basic rules that are typical for investing and trading any assets, the crypto space is characterized by a number of additional rules. Let’s consider both categories of recommendations.
The key value 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, VIP channel paid signal or own analysis can be 100% 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 are closed in plus, and one becomes unprofitable, the primary task of the user is not to fall into such a “pit” of periodically repeating error with excess or all the more capital.
What can be done 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 medium-sized 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 money properly.
There is a possibility that it is the transaction opened for the entire deposit that will be unsuccessful. The losses on such a trade will exceed the profits of all previous smaller trades, and all the work done on the trading strategy will be in vain. At the same time, it does not matter that a transaction opened for the entire deposit may turn out to be successful several times. Such random luck, without 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 one strategy. In this case, an unsuccessful transaction ceases to be an event, let alone a tragedy, but is an expected phenomenon for which the user is ready.
What part of the deposit can be allocated for a deal?
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 one transaction, for trading positions with leverage, the above value must be reduced by the amount of leverage. Thus, for especially risky trades with 5-10x and higher leverage, the position size can be only 0.5-1% of the user’s entire portfolio.
When it comes to long-term investing, 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 can be the flagships of the BTC and ETH sectors, whose share in the portfolio can be significantly larger. 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.
To visually understand what can happen to most projects over time, the service of recording the historical values of the market capitalization of blockchain assets helps. Most of the coins and tokens of past years, once the leaders of the list, will not be familiar to new users at all, being in the “backyard” of today’s crypto world.
Understanding Diversification for a Crypto Portfolio
One of the approaches to the distribution 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 DAGs and other blockchain alternatives, decentralized file storages, data and computing power markets, DeFi, content platforms and video hosting, DAO, Metaverse and NFT platforms, Internet of things, decentralized identity, data encryption and many other industries.
It is difficult to call a balanced portfolio that contains 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 across industries will be risky if they are too tied to just one blockchain. If all the user’s assets represent one ecosystem, the risk of a fall in the entire portfolio in the event 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 broad sense of the word refers to many types of diversification: diversification of technology application sectors, diversification of blockchains and ecosystems themselves, diversification of DeFi platforms and centralized exchanges, diversification of software and technical equipment.