In traditional markets, risk management has tools: position sizing, stop losses, correlation limits, VaR models. In crypto, those tools mostly don't work because the distributions aren't normal and the correlations go to 1 when you need them not to.
So what does risk management actually look like here? Is it just “don't put in more than you can afford to lose”? Which is less risk management and more risk acceptance? Or are there actual practices that work in this environment?
The only approach I've found somewhat useful is treating every position like it could go to zero and sizing accordingly. But that's just pessimism with a spreadsheet. I'm curious what people actually do. Not what they say they do, but what they actually do when a position is down 60% and the fundamentals haven't changed.
What does “risk management” actually mean in crypto?
byu/jts_14 inCryptoMarkets
Posted by jts_14
3 Comments
Tell me do you consider a nicely put stop loss from your entry point a risk managment?
For me, risk management in crypto starts before the entry.
Position size matters more than the stop, because gaps, wicks, and liquidity can make a “clean” stop less clean in practice. I’d also separate thesis risk from trade risk. If the reason for entering is broken, that is different from just being down during a volatile move.
So yes, “only risk what you can lose” matters, but I’d call that the baseline. The actual work is sizing, having invalidation levels before entering, avoiding too much correlation, and not letting one position decide the whole portfolio.
Risk management would be based on what your risk tolerance is and how to mitigate or minimize loss. There is much uncertainty with crypto or other high risk investment vehicles however there is less uncertainty with lower risk investment vehicles. Risk management is relative to your desired outcome. It’s not the same for everyone. I am sure there is crypto where you know how, for the most part, it will perform and others where it’s truly a rollercoaster. Know your tolerance and do what you can to minimize loss.