Risk Diversification Method

Risk Diversification Method

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The risk diversification method is actively used by investors and traders in the cryptocurrency sphere. In this industry, the value of assets changes quickly, during the day the rate of a popular coin can noticeably grow or collapse, sometimes the price changes by tens of percent in any direction. Due to the high volatility of cryptocurrency , investors who invest in it are always at risk. But risks can be foreseen and reduced. Let’s talk about diversification as a method of risk management and capital protection.

Risk hedging: what is it

One of the most effective risk management tools is hedging, which protects the trader from price collapses and other unforeseen events. This is a series of strategies that are used to compensate for losing positions with income from successful investments. Diversification refers to hedging strategies, it allows you to solve several problems:

  • reduce losses in case of depreciation of one of the assets;

  • save and increase funds by receiving income from fast-growing assets;

  • increase the chances of raising capital in the long term.

Diversification as a method of reducing risks and protecting capital

Diversification as a Method of Financial Risk Management involves drawing up a balanced investment portfolio, consisting of different assets, with varying degrees of risk. Successful investors know that investing everything in one asset is dangerous. The idea of diversification is to diversify assets. Investments in one cryptocurrency make the portfolio dependent on the dynamics of the price of this coin – this approach does not comply with the principles of risk management. If the asset price decreases, the entire portfolio will become several times cheaper.

Money does not come from nowhere, it moves from one market to another. Diversification is based on this principle. By sticking to its basics, a trader reduces risks, because when some assets become cheaper, others can gain in price and become more liquid.

As part of diversification, investors invest in various types of cryptocurrency projects, for example, in the coins themselves and in ICOs. A portfolio that is balanced is a portfolio that is dominated by a large-cap cryptocurrency , typically Bitcoin , but also includes mid-cap and low-cap coins.

Stablecoins to protect the investment portfolio

Diversification and risk management methods include the investment of funds in stablecoins . This is a cryptocurrency whose exchange rate is pegged to fiat currency. The most common and profitable for investment are stablecoins , the price of which is pegged to the US dollar. The most popular of these tokens is Tether , created by the company of the same name. The rate of one Tether is equal to one dollar. The capitalization of this token is growing rapidly, indicating its demand and popularity. A stablecoin is often used to balance an investment portfolio.

The second most popular after Tether is the USDC stablecoin issued by Circle . The advantage of the token is registration in the USA, this cryptocurrency is controlled by American regulators.

The main function of a stablecoin is to fix profits from investments or trading . They allow you to protect your capital from losses due to the high volatility of the cryptocurrency , while not withdrawing the crypt to the cache. By having stablecoins in your investment portfolio, you can significantly reduce risks, regardless of the market situation.

Stablecoins can be compared to the most liquid and popular fiat currencies. Most people prefer to keep their savings in US dollars, euros, British pounds or Swiss francs, as these are relatively stable currencies that protect the portfolio from risks. Similarly, stablecoins , into which cryptocurrency investors transfer part of their capital, allow you to save money, regardless of market crises.

To learn more about what is a risk diversification method , you can visit the Crypto community Crew . We teach novice traders and investors how to earn on cryptocurrencies by managing risks. By studying the materials of our community, you will learn how to build an investment portfolio correctly. And in order to start making money successfully on the crypto exchange , take our trading training course !