RISK MANAGEMENT IN CRYPTO
Plain English
Crypto is uniquely risky: 24/7 markets that never sleep, 90% drawdowns that last years, exchange collapses, hacks, rug pulls, and regulatory crackdowns. The people who survive long-term treat it as a small portion of their portfolio and use strict risk rules.
Going deeper
Crypto risk management requires accounting for risks unique to the asset class: Volatility Risk (70-90% drawdowns from peak are common in bear markets), Counterparty Risk (exchange or protocol failures — FTX, Celsius, Mt. Gox), Smart Contract Risk (bugs draining billions — The DAO hack, various DeFi exploits), Regulatory Risk (government bans or restrictions — China in 2021), Liquidity Risk (inability to exit positions in illiquid altcoins), and Key Management Risk (losing access to wallets). Best practices: Only invest what you can afford to lose entirely. Never store large amounts on exchanges long-term. Hardware wallet for significant holdings. Diversify across asset classes — crypto should be a small % of net worth. Use DCA rather than lump-sum for volatile assets. Set position size limits per coin. Know your exit strategy before entering.
Examples
Position Sizing Rule
Portfolio: $100k total (stocks, bonds, cash, crypto). Rule: max 10% in crypto = $10k. Within crypto: max 40% in BTC = $4k, max 30% in ETH = $3k, max 30% in alts = $3k max $1k per altcoin. If crypto 10x's you profit significantly. If it goes to zero, portfolio survives.
The 'Never Risk What You Can't Lose' Test
Before any crypto purchase: 'If this goes to zero tomorrow, does my life change significantly?' If yes, you're sized too large. In 2022, many retail investors had 50-80% of savings in crypto. When markets dropped 75%+, they were financially and psychologically devastated.