- Bitcoin approached $100,000 as crypto markets surged following Trump’s election victory.
- But crypto is a volatile and risky asset class.
- Taking profits, setting stop losses and diversifying into other assets are ways to reduce risk.
Christmas has come early for crypto investors.
Since Donald Trump’s victory in the presidential election, cryptocurrency markets were bubbling. Bitcoin, the poster child of crypto, has continually reached new highs this month, sending its price within striking distance of $100,000.
If you’ve been lucky enough to see some of these returns, you might also be worried about an impending crash, as cryptocurrency prices tend to be volatile.
While it’s common in crypto circles to glorify “HODLing” or “holding on for dear life” and resisting the urge to sell your positions, this can prove to be an unwise strategy.
Take for example the story of Glauber Contessoto. The 37-year-old cryptocurrency trader has become a Dogecoin Millionaire in 2021 after his initial investment of $250,000 in Dogecoin exploded in just three months. Then things went south.
“At the peak, my Dogecoin was worth $3 million. And then after that, the bear market came and crypto in general fell,” Contesso told Business Insider in an interview. “I saw my portfolio go from $3 million to about $200,000.”
As crypto assets enjoy another rally, Contessoto says he plans to approach things differently this time, taking profits earlier and diversifying. These are common strategies for investors to lock in their gains and reduce the risk of losing their money if prices fall.
Here are some ways experts recommend reducing risk after a big surge.
Profit-taking strategies
First, have a plan for exiting an asset.
It is important to have an exit strategy to minimize potential losses, especially with a risky asset class such as cryptocurrency. According to Fidelity Investments, it’s never too early to start thinking about it. While an exit strategy will be tailored to each investor’s risk tolerance and preferences, there are some general guidelines.
When it comes to earning, have a rough idea of how much you want to earn from your cryptocurrency investment, according to cryptocurrency platform Digital Surge. The best way to make gains is to start taking profits gradually once your assets reach a certain level. For example, you could follow a rule such as taking 5% of profits for every 25% price increase.
Don’t underestimate the volatility of the crypto market. A common strategy among crypto investors who have seen significant price appreciation is to at least make profits equal to the amount of your initial investment.
Set up stop losses
No one likes to think about losing money, but having a plan in case your investment performs poorly is important to good portfolio management.
Consider setting up a stop-loss to automatically cash out your position if your cryptocurrency falls below a certain price, saving you from having to constantly monitor the price of your crypto assets. These can be fixed price or can track your investment’s price gains by a certain percentage.
Diversify
Your investment strategy will depend on your risk tolerance, but one way to reduce downside risk is to spread your money across a number of assets. Contessoto has his entire portfolio in various cryptocurrencies, but even this is a very risky approach. Cannon doesn’t advise following in his footsteps: “Even if you believe in it 100%, it’s risky to simply have your entire net worth in one asset class.” »
“If they have all their net worth tied up in cryptocurrency, I think they should diversify,” Cannon added. He suggests stock index funds as a starting point for de-risking a cryptocurrency-heavy portfolio.
Especially with meme coins like Dogecoin, seemingly arbitrary events can trigger massive fluctuations in cryptocurrency prices, making diversification all the more necessary. In 2021, the Dogecoin rally was fueled largely by Elon Musk’s tweets supporting the cryptocurrency. And recently, Dogecoin soared 15% after the announcement of the appointment of Elon Musk as head of the Ministry of Government Effectiveness.
Ultimately, Contessoto accepts the volatility that comes with investing in Dogecoin and other meme coins. After all, it is unlikely that you will be able to quadruple your initial investment and become a millionaire in just a few months if you buy a more traditional and stable asset.
Don’t take Contessoto’s strategy as financial advice, though. It’s easy to glorify success stories, but there’s no doubt that investing in cryptocurrency is risky, especially when it comes to meme coins.
“These things are very high risk,” Contessoto said. “They strike and you win life-changing money, but when they don’t, you lose everything.”
Check Business Insider’s picks for best cryptocurrency exchanges