Due to the volatility of cryptocurrencies, all crypto currencies have high risks. But, high risks also mean higher returns for investments. Moreover, despite the fact that their values can still drop or raise significantly from one day to another, digital currencies are slowly but steadily finding balance in the financial world. We have yet to see the explosion of the crypto bubble that financial experts have been predicted for years. In fact, the experts are not accepting the obvious potential of digital assets, as well as their solid role in the future of finances. Moreover, just like with all investments, there are numerous ways in which one can manage and reduce the risks of crypto investments. Are you going to make investment somewhere the read first our latest article on Are You Making These Investment Mistakes? at financeclap.
Short overview of crypto investments
Digital currencies have been around since 2009, when Bitcoin was introduced in the financial world. However, the initial investors were anything but serious investors. Many people even completely forgot about their bitcoin investments, only to remember them many years later and find themselves rich overnight. However, in the last couple of years, cryptocurrencies turn into a serious sector of the financial industry, and they started attracting serious investors. The appeal for this type of investment is very obvious. Due to their digital nature, these currencies are expected to replace fiat currencies. Moreover, since they are still new compared to other assets, they represent a temping early investment. Bitcoin continues to be the forerunner in the crypto world, but altcoins also have a great potential. For example, Ethereum’s value has increased by 3000% since it first hit the market, Zcash’s value increased by 1000% and Litecoin’s value increased by 700%. These value surges can attract a lot of naive investors, but since this market is very volatile, it is essential to put together a good system for managing the investment risks.
Risk management solutions
Like it goes with all investments, the best solution for managing and reducing the investment risks is to diversify the portfolio. This usually requires a lot of research, and many young investors are still struggling to understand the crypto world. As such, they usually turn to third parties for help.
- Crypto funds – The beauty of funds is that you don’t have to break the bank to have a diverse portfolio, as your money will be spread across multiple assets, regardless of your investment. Crypto funds are usually managed by global fund services that specialize in digital assets. Companies like Stonegate handle the whole process from the cryptocurrency fund formation to the full spectrum of the fund’s administration.
- Initial coin offerings and custom coins – The initial coin offering is the process through which startups raise money to launch their businesses. Although startups bring their own risk to the table, your overall investment risks are still diminished, as it is no longer tied to a single asset.
- Decentralized derivatives – These work in a similar way like traditional derivatives, protecting asset holders against market volatility. Crypto decentralized derivatives are still a rather new concept, but there are now several platforms on the blockchain system that are fully transparent and don’t involve any brokers.
- Hedge funds – In traditional finances, hedge funds are used to balance potential losses by using a companion investment. A hedge fund is basically an insurance policy, and in the crypto world, they world exactly as they do in traditional finances.
High liquidity digital assets – The higher the amount that an asset has in circulation, the lower the trading impact will be. This means that if there is a small amount of assets in circulation, individual investors can significantly affect the value of the assets with each trade. However, when you invest in a high liquidity asset, it is less likely for investors to have a considerable impact on the asset’s value.