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Article by Coindesk: Sebastian Sinclair
When it comes to trading, there are several steps you can take in order to reduce your exposure to the market extremes of price volatility.
A combination of both technical and fundamental analysis can be used to determine the true worth of a company or asset, securing a greater chance of success with a particular investment while reducing your risk along the way.
But for that, you need a plan.

Mastering your emotions

Developing a successful risk management plan is paramount in minimizing unexpected outcomes, translating into an overall reduction in your losses.
A successful risk management plan should also run parallel to your crypto trading journal records, working in conjunction to curb poor trading behavior while simultaneously justifying your fundamental expectations.
Sometimes temptation leads to poor choices and it is no more on display than a market driven by fear and greed.
By reducing harmful or negative trading habits, one can hope to increase profit without putting too much on the table.
A key component of a successful risk management plan is determining what kind of trader you are and where your skills currently lie:

• “I usually break even” — When this occurs it could be a sign that your risk management is effective, however, you are also too risk averse and will fail to capitalise on anything substantial or you are barely able to cover trading fees.
• “I make a small profit” — When this occurs it could be a sign that your risk management is effective, however, it is also an indication that you aren’t letting your trades run. It is usually driven by emotionally charged decisions made in haste, such as closing a position too early because of what is known as “weak hands.”
• “I make a large profit” — When this occurs it is a sign that your risk management strategy is working well and that you have reached a pinnacle in risk aversion by applying trading sizes to the appropriate risk. It is usually an indication that you close positions at predetermined prices and let others run their course.
• “I usually lose” — When this occurs it could be a sign that you have limited understanding of market cycles, need to further your research on the asset class you are investing in and you tend to pick illiquid projects/coins/tokens.

From these personas you can draw a rough idea on where you currently sit in terms of your trading mentality. The idea is to identify what habits are forcing you to lose out and which habits are guiding you to profit.
Try to remain stoic and reasoned, removing emotion from the psychological aspect of trading while relying solely on the information in front of you such as the price, volume, news and trend.

Don’t put all your eggs in one basket

No matter how tempting or promising a particular trade opportunity may appear it is never a good idea to place all of your worth on the line.
Generally, a spread of one particular type of asset class (as well as a generous mix of different asset classes within your portfolio) is an ample measure in reducing your exposure to larger price moves within a particular industry/market.
The volatility of the cryptocurrency market means that any trade, even a seemingly perfect trade, can collapse and result in a significant loss. Therefore, it is recommended that you start investing in 5 or more different coins.
Also remember to take advantage of an exchange’s stop-loss feature and use it to your benefit when you are away from trading manually such as times of rest or at work.
Time and again new traders fail to incorporate an adequate exit strategy, often arriving back at their computer to find their beloved basket of crypto have dropped 20 percent and a new trend has developed to the downside. This act not only reduces your risk but allows for greater control over your losses.
Finally, it can be tempting to use a buy and hold strategy where you invest in a coin and refuse to sell for an extended period of time. This passive approach is often tempting to new traders due to its simplicity and is often falsely associated with reducing one’s risk.
However, you’ll unlikely amount to any significant wins by playing it too safe, so dive in, take on the adequate risk and ensure you have a plan mapped out because trading crypto can be a fun and profitable endeavour when executed correctly.
Disclosure: The author holds no cryptocurrency assets at the time of writing.
See-saw image via Shutterstock

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Article by Coindesk: Sebastian Sinclair
Bitcoin (BTC) is like any other asset class in that it captures value through organic price discovery conducted via trading activity on global exchanges.
Yet leverage and margin trading, in general, can help “turbo-charge” demand for an asset. They can also free up capital, thus increasing liquidity within a given market as traders look to use their capital elsewhere.
It’s an investment strategy of using borrowed money for the use of various financial tools to increase the potential return of an investment.
It’s also an efficient use of trading capital, valued by professionals because it allows them to trade large positions without committing 100 percent of their capital to a risky spot position.
For example, a trader that wanted to buy a thousand tokens at $1 apiece would only require a $100 of trading capital, depending on the leverage used, thereby leaving the remaining $900 available for additional trades.

Why leverage matters for bitcoin

Often touted as the most liquid cryptocurrency asset available, BTC benefits from leverage and margin trading activity by allowing investors and traders to lock in a position while maintaining a portfolio of other cryptos. It also provides professionals and retail investors with additional tools to capture value in the crypto market. In effect, greater demand on the asset class vastly improves the potential for more accurate value capture through organic price discovery.
Participating in a live panel discussion at Invest: ASIA in Singapore, Lennix Lai, financial market director at OKEx told Coindesk:

“If you can only buy or sell particular underlying tokens of bitcoin and you don’t have the capability to short, basically speculate in another direction, then the market would be a lot more volatile because it would be entirely driven by sentiment.”

“For example, you can view bitcoin as being much more volatile before CME Futures were introduced … so we should have more financial instruments like options to assist further in the price discovery process in relation to volatility,” he said.
Greater access to capital means greater liquidity, without actually increasing the number of traders in a given market. It provides a means for increasing capital inflow without attracting any new money.
And while the total market capitalization of the crypto market has been on the slide alongside declining total volume, the pressures from a bear market can be offset through leverage and margin trading.

What’s the risk?

Of course, the rewards don’t come without inherent risks, as a loss can lead to the liquidation of a trader’s capital and force spot prices lower. Such an event recently took place in BTC’s futures market on Sept. 24 triggering a “long squeeze“.
If the cryptocurrency underlying a trade moves in the opposite direction to what was expected, leverage can greatly amplify the potential losses. To manage the risk associated, traders usually implement a strict trading style that includes the use of stop orders and limit orders designed to curb potential losses.
Also speaking on the panel in Singapore, Sunny Ray, head of global business development at the Kraken crypto exchange, explained how exchanges protect themselves from that risk:

“If there’s a lot of volatility in the market, if the value of the asset drops below 20 or 30 percent, there is something called a margin call that takes place where a company will actually liquidate the customer’s assets to cover some of those losses.”

There are currently eight major exchanges that offer the ability to leverage crypto, with several others offering margin trading accounts such as Kraken, Binance and Deribitm, while Bakkt’s release of its futures product on Sept. 23 adds to the opportunities for more authentic price discoveries.
Disclosure: The author holds no cryptocurrency at the time of writing.
Bitcoin image via Shutterstock