Welcome to our post about crypto passive income portfolio risk management 2021.
In this guide we will discuss why what risk management is and why it´s so important in 2021 for a long term investor.
Further, we will make some suggestions on how you can manage your risk with simple diversification of your portfolio.
Go forward to this article, if you rather go on and read about crypto passive income possibilities.
What is Risk Management?
Risk management is the process of identifying, assessing and controlling risks to your crypto portfolio and earnings.
These risks could arise from a variety of sources, including crypto scams, crypto regulations, crypto hacks, computer bugs, management errors and more.
Let´s take an example.
You have decided to buy Bitcoin with fiat currency and deposit your Bitcoins into interest accounts to earn passive income.
- First, you buy your Bitcoins at three different occasions to minimize the risk to buy at a peak.
- Secondly, you research the internet and find 5 different alternatives to deposit your Bitcoin into in order to earn passive income. They all give the same interest rate but when you make some research you find out that 1 is missing insurance cover and 1 is a very new site with no track record.
- You end up with three remaining sites you think are equally safe to deposit to so you decide to deposit 1/3 of your Bitcoin holdings to each one of them.
Summary: In the example above you did minimize your risks to buy Bitcoin at a peak, you minimized your risks to deposit into a service that have larger risk to fail and you did diversify your investment since any service can fail for the above mentioned reasons that you are not in control of.
What is Crypto Passive Income?
Crypto passive income is earnings from a crypto related service or product which a person is not actively involved.
Examples we focus on at Cryptocoinzone are
- Crypto interest accounts
- Crypto staking
There are also other ways to earn crypto passive income
- Mining (We wouldn’t really consider mining as passive income since it involves a lot of work in running mining facilities)
Some would says these are passive income
- Affiliate income (However, this is not a passive income according to us and we are running an affiliate site. Its a lot of work to get good affiliate sign ups and definitely not your money working for you)
- Writing a book about crypto and publish it (We don´t agree that this is passive income since you have to market it if you want to sell it. Again, its not your money working for you9
What is a Diversified Crypto Portfolio?
When it comes to risk management, regarding any investment, diversification always plays a central role.
Simply because you should never put your entire portfolio at same risk. We discuss this more in the next section.
Now, lets focus on what a diversified crypto passive income portfolio is.
Let´s take an example.
Diversified portfolio VS Non diversified portfolio
- You have passive income from three different sources and those three different sources are based on three different cryptocurrencies and three different passive incomes.
Let´s say you portfolio consists of $10.000 equivalents in cryptocurrencies
Now, a diversified portfolio could look like this
- $5000 worth of BTC deposited to YouHodler to earn 5.5% interest
- $3000 worth of Ether staked on ETH 2.0 staked with Kraken
- $2000 worth of Cardano staked with Binance
Why Should I diversify my crypto Passive income portfolio?
Now, why should you diversify your crypto passive income portfolio?
Simply to reduce the risk to loose it all at the same time
Why is this so important?
Let´s take an example
We compare two portfolios where 1 is diversified, as above, and 1 is non diversified.
You have invested 100% of your portfolio into a Cardano ADA staking contract with a 3th party service. The company behind this staking service goes bankrupt because of bad services. You will probably loose 100% of your investment.
Assume you had invested according to the diversified example above. You would now have lost 20% of you portfolio worth $2000.
- Your $5000 worth of BTC will still give 5.5% interest per year which equals about $275 per year
- Your $3000 worth of ETH will still give you around 5% income per year which equals about $150
Now, it would take about 4 years to get back to where you were. This is not a great scenario but it is much better than Example 1.