Guest post by Charlie Fletcher who looks at cryptocurrency and risk management.
In the aftermath of the COVID-19 pandemic, we’re all looking for a little bit of certainty in life. After all, we’ve faced years of lockdowns, market volatility, and the looming threat of a global recession. And that means that whether you’re a business owner seeking new ways to help your business navigate these turbulent economic waters or you’re an investor hoping to hit on a promising opportunity, risk management is probably at the top of your priorities list.
With this in mind, it’s perhaps not surprising that many investors and entrepreneurs have turned in recent years to cryptocurrency as the ideal way to minimise risk and maximise returns. Unfortunately, the crypto crash put an end to such certainty. Indeed, it seems that the sudden and severe downturn in the crypto market has a lot to teach us about risk management.
What Cryptocurrency Can Teach Us About Risk Management
This article examines the most important risk management lessons we should take from the crypto crash.
There’s No Such Thing
Once upon a time, crypto was heralded as the only truly sure thing in the financial world. It was believed that cryptocurrencies were insulated from the fluctuations of the global market and their value was thus immune to the highs and lows of the market, unlike traditional investments, such as stocks or bonds.
The reality, though, is that, like Mark Twain’s death, the reports of cryptocurrency’s security have been greatly exaggerated. Crypto is still a novel innovation. Investors and analysts still cannot agree on or clearly define what cryptocurrency even is, let alone agree on its expected future value.
What this can teach us about managing risk is pretty simple but also extremely important: there is no such thing as an entirely risk-free investment. If anyone tells you otherwise, that’s usually a flashing red warning sign that something is rotten in the state of Denmark.
Diversify, Diversify, Diversify
One of the most significant harms inflicted by the crypto crash derives from the fact that the majority of crypto investors failed to diversify. And that means that when the crypto market bottomed out, investors had few if any alternative assets to minimise their losses.
Herein lies another powerful takeaway from the crash. If you want to manage risk effectively, then it’s imperative that you spread risk around. By diversifying your assets, you can be fairly well assured that a crash in one sector isn’t going to entirely wipe you out in another. What this means is that crypto trading can be a great investment, particularly over the long term. After all, despite the steep declines in recent months, crypto remains a popular form of alternative investment, especially among young adults. Perhaps most important of all, interest in crypto trading appears to have waned very little, even in the aftermath of the crash.
This suggests that crypto is probably not going away anytime soon. And, so, like the savvy risk manager, as long as you are prepared to shake up your investment strategy, drawing from many wells rather than just one, and if you have the patience to ride out the inevitable lows that accompany any form of trading, the odds are you will come out ahead in the end.
Assess, Reassess, and Adapt
The crash of the cryptocurrency market may have come as a shock to most investors, to those who had believed that the legend of the “sure thing” had been realized at last. But to every cloud there is a silver lining and, in this case, the upside may well be that crypt traders have learned to be a bit less idealistic and a bit more realistic.
As it goes for crypto, so should it go for risk management in general, regardless of the precise form that may take. For instance, when you are a business owner seeking to help your company survive and thrive in competitive and crowded markets, it’s critical to mitigate risk by continuously surveying, assessing, and reassessing the financial and operational health of your company and of the environment in which it lives.
This would include, for instance, closely monitoring budgets and expenditures to ensure that effective adaptations can be made at the first sign of threat. In addition to this, it is important to ensure that risk managers remain absolutely clear on their priorities. It may be tempting to go all-in, for example, on a promising opportunity, but if it means putting a higher-order good in jeopardy, then it isn’t worth it.
For instance, you may seek to cut costs in your business so that you can expend more on trading and investments. But if you try to increase capital by cutting wages or staff, you may well be putting the entire company at risk by prioritising a lesser good (an investment opportunity) for above a greater one (protecting and preserving your workforce).
The crypto crash took millions of investors by surprise and resulted in untold losses in digital and fungible assets alike. Nevertheless, if there is any good to be found in the collapse of the crypto market, it’s that it provided existing and would-be investors with a number of invaluable lessons in risk management, lessons that apply not only to crypto trading but to most every domain of finance, entrepreneurship, and, well, life in general.
Bio: Charlie Fletcher is a freelance writer passionate about workplace equity, and whose published works cover sociology, politics, business, education, health, and more.
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