The importance of risk management and psychology in the cryptocurrency market

During the active growth of the virtual currency market in 2017, a real cryptomania was observed. We witnessed cases when people went to extremes, translating all their savings and assets in Bitcoins. Some investors were practically obsessed with a strong bull trend, but then there was a turn, which lasted throughout 2018 and destroyed the plans of many investors. Therefore, before selling cryptocurrency, it is necessary to determine the acceptable level of risk, to properly arrange priorities and understand the psychology of the market.

The cryptomic is considered relatively young, so it is still characterized by a high level of volatility. An important factor at the same time is the presence of a huge list of available virtual assets for every taste. Investors must be taken into account excessive abundance, before entering the market for the first time.

Although their distribution is the key element in risk management. In order not to put all the eggs in one basket, it is necessary to have access to a sufficient number of traditional assets and cryptocurrency. In 1990, Harry Markovitz received the Nobel Prize for what mathematically proved the effectiveness of diversification to minimize the risks and the possibility of forming an optimal portfolio.

His portfolio theory (TPM) assumes that the investor simultaneously seeks to maximize profits and reduce potential risks, so it is forced to compromise. The proposed economic model assumes that each establishes an acceptable level of risk and is trying to achieve as much yield as possible within its limits.


The researchers concluded that TPM makes it better to consider changes in the dynamics, and the dispersion reduction can be achieved through the use of assets with low linear dependence.

It may seem that due to the volatility cryptocurrency is enough to correctly determine the entry points to buy cheap and sell expensive. However, in practice, this strategy is very difficult to implement, since the change in changes is almost impossible to predict. This is evidenced by the annual price decline all virtual currencies, which influence the psychology and emotions of many market participants, encouraging them to make irrational actions.

People tend to follow the crowd. The fear of missing a good time to exit positions, uncertainty and doubt play a huge role in crypto investment psychology. Many instinctively respond to news that could potentially lead to price collaboration to new minima, strengthening the concerns of traders and encouraging them to sell available assets at a loss.

The ban on the exchange of cryptocurrency in China or a comparison of the JP Morgan chapter of virtual currencies with tulips bulbs are classic examples of news that have a negative impact on the cost of coins. Although it is worth noting that now traders have become more resistant to similar sensational news. However, the proportion of irrational actions is still significant.

Greed is badly combined with investment and trade. There are many stories about people who are so fascinated by the cryptocurrency and a digital revolution that they have invested all available funds in them, expecting endless growth.

The Diddi Taichutta is also related to their number, which in 2017 sold all the property, including home and jewelry, to buy bitcoins for the reversed money. This is just one of the many examples when people went to extremes and moved to live to familiar or in the car to save each penny to replenish their investment portfolio.

Extremes are unnecessary in any activity, especially if you have a family and funds grabbing on its content. Is it worth investing in a high level of risk in such a situation? At a minimum, such a solution must be discussed in advance.

In any case, before investing the means, it is necessary to study the features of technology, to consider possible options for the development of events and correctly express priorities. This will significantly increase the chances of obtaining maximum profits and help to avoid trade under the influence of emotions.

Despite the fact that cryptocurrencies became a popular speculative tool, initially they were created as a digital alternative to money for citizens and business. Today there is a whole