Investing in crypto is a business that comes with no shortage of risks. You may have heard of the $ 500 billion disappearance from the crypto market in May. This action led to the liquidation of more than $ 8 billion in a Black Wednesday event. This action wiped out over 50% of bitcoin’s high value of $ 60,000, and as such, over 20% of the market value of crypto technology is gone.
Managing the risks of crypto technology can be very complex, although many people expected its slowdown to happen, few expected it to hit hard. Although risk management can be difficult to perform in a difficult environment, there are certain principles we can apply to reduce these risks. You can get more information about these risks here but let me summarize
Principles to be used to mitigate the risks of the crypto market
Risk parity and Ray Diallo
The risk parity was championed by Ray Diallo, a legendary cryptocurrency investor who managed the All Weather fund and made it worth $ 150 billion. Risk parity is a system that allows an investor to balance risks by investing in different asset classes. Through these investments, less funds are not revealed to the potential threats that affect the entire investment.
The risk parity system will select different asset classes to reduce investment risks while generating returns. To use this system, fund managers must select different categories with no related gain which can be difficult to find. By spreading your investment risks across different categories, returns would be maximized over a period due to long term stability. Learn more about the Bitcoin formula.
Risk parity and crypto
Developing a crypto risk parity profile has been a problem for some time as the crypto market was dominated by a currency known as Bitcoin. When the value of bitcoin has gone up, the whole market goes up and when the value of bitcoin has gone down, the market has gone down. Regardless of the changes in the price of bitcoin, the value of the sum of the market capitalization of the market class has been determined.
With bitcoin’s dominance in the market, it was not possible to ask for risk parity for crypto wallets. However, things have started to improve over the past year for an exciting crypto industry known as DeFi. DeFi is a cryptographic technology that serves as an alternative to the accepted financial system. DeFi relies on smart contracts to enable interaction between peer-to-peer blockchain users rather than relying on banks, brokerage houses and market makers.
With DeFi, there are many different approaches available with different levels of rewards and risks. This decentralized finance offers users the ability to request risk parity for their crypto profile.
High returns with reduced risks
Thanks to the combination of crypto assets with DeFi strategies, the fear of crypto prices falling like they did in May will not happen due to DeFi’s stable APYs. There are unique platforms that suggest people use a Robo advisor who builds a profile based on the client’s funds and risk appetite. These portfolios will split your funds between different asset classes based on certain factors such as investment allocation to reduce connection and maximize the best profits from each investment due to the owner’s risk tolerance level.
Many people and institutions are moving to DeFi because many investors want a share of the benefits. The risks associated with their wallet will be detrimental if their launch into the crypto tech world ends in a crash or if they thrive and survive for people who want less risk in cryptocurrency.