Welcome to our post where we present our crypto risk management strategy 2023 for passive income.
In this guide we will discuss why what crypto risk management is and why it´s so important in 2023 for a long-term investor seeking to earn crypto interest rates APY and the highest staking rewards.
Further, we will make some suggestions on how you can manage your risk with simple diversification of your portfolio.
No Financial Advice, Information only. Do your own research
What is crypto Risk Management?
Crypto risk management for cryptocurrency HODL investment strategy is the process of identifying, assessing, and controlling risks to your crypto portfolio and earnings.
Let’s start to identify some crypto investment risks
What are some crypto Investment Risks?
In the bullet list below, we have identified some of the risks your crypto investment is exposure to.
- Volatile crypto markets where you might end up selling at the bottom
- Crypto scams, rug polls and Ponzi-schemes in an unregulated market
- New crypto regulations
- Crypto hacks and protocol bugs in a market with no, or limited insurances
- Human management errors. (There is no way to regret a transaction and the base technical level for transactions are still quite high)
- Crypto businesses are new in a new market and can run bankrupt due to bad business. This is hard to evaluate because many companies have a limited track record.
How to handle volatile crypto markets and minimize the risk?
One easy way to handle volatile crypto markets is to use the dollar-cost averaging in and dollar-cost averaging out method.
What does crypto dollar-cost averging in mean?
The dollar-cost averaging in method refers to the practice of systematically investing equal amounts, spaced out over regular intervals, regardless of price.
The dollar-cost averaging out method refers to selling over regular intervals.
How to avoid Crypto scams, rug polls and Ponzi-schemes?
Unfortunately, the crypto market is full of crypto scams, rug polls and Ponzi-schemes.
Also, there is no easy way to avoid all these companies because they specialize in winning your trust and deposits.
However, there is an easy rule to follow and this is to stick to the well-know big companies with a great track record and a great team. We have listed such companies in our article about regulated, safe and licensed crypto companies with insurance.
However, they are not even 100% safe (nothing is).
How to handle new crypto regulations?
There will be many new companies that will not be able to afford to adjust according to new regulations in the crypto markets.
However, all the companies mentioned in the link in the above section welcome crypto regulations and are well prepared for these to come into the market. They work very close to crypto regulators.
How to avoid crypto hacks and protocol bugs?
It´s of course to avoid crypto hacks and protocol bugs and therefor a crypto risk management strategy is even more important.
To minimize the risk for a crypto hack or a protocol bug it´s important to diversify. This will not reduce the risk to get exploited but it will reduce the impact of such a hack or bug on your crypto portfolio.
How to avoid human errors in crypto?
Again, its impossible to avoid human errors but you can reduce the possibility and the impact of such a incident. For example, when we are about to transfer a large amount of crypto, we always start by testing with a small amount of crypto.
How to avoid bad crypto businesses?
Make sure to make your due diligence or you can make it easy and stick to the large and well-known companies in the space. Again, check our list with regulated and licensed crypto interest accounts with insurance.
Crypto Risk Management Example
Let´s take an example where you earn Bitcoin interest as passive income.
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 and may be in cryptocurrencies particular, diversification always plays a central role.
Simply because you should never put your entire portfolio at the same risk. We discuss this more in the next section.
Now, let’s focus on what a diversified crypto portfolio allocation strategy for a passive income portfolio is.
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
A diversified portfolio could look like this
- $5000 worth of BTC was deposited to NEXO earning 7%
- $3000 worth of Ether staked on ETH 2.0 staked with Kraken, earning Ethereum ETH interest
- $2000 worth of Cardano staked with Binance, earning Cardano interest
While a nondiversified crypto portfolio could look like this
- $10.000 invested in Bitcoin BTC deposited to NEXO
In the nondiversified example, you could lose your complete portfolio if either NEXO or Bitcoin fails while you would only have lost 50% of your portfolio if the same event happened.
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.
No Financial Advice, Information only. Do your own research