Prudent risk management is a crucial step in any type of investment, including in the field of crypto-assets. Crypto markets are often characterized by their volatility, which makes it even more important to adopt effective risk management strategies. Before diving into the key aspects of risk management, let me remind you of Warren Buffett’s two rules of investing:

“Rule number one is never lose money. Rule number two is never forget rule number one.”

When I began my journey as a crypto investor in 2020, I was completely unaware of these two rules, and believe me, I paid the price by losing half of my capital within the first few months following my initial investment. How is this possible? We can find the answer to this question in the Bible. In the book of Hosea, it is written: “My people are destroyed for lack of knowledge.”

Ignorance is a danger for any investor, and especially for the crypto investor, because they operate in a highly volatile market. Benjamin Graham once said:

“The investor’s chief problem—and even his worst enemy—is likely to be himself.”

Ignoring the principles we will discuss below is synonymous with exposing yourself to the risk of losing your capital and failing in the crypto market. I apologize in advance if some principles have already been covered in the financial education section and will be mentioned again here, not because we have nothing new to say, but because repetition helps solidify knowledge.

Principle 1: Diversify Your Investments

It cannot be emphasized enough: Do not put all your eggs in one basket. Diversify your portfolio by investing in different crypto-assets rather than concentrating your funds on just one. A diversified portfolio ensures good long-term growth and helps limit financial risks.

Consider sectoral diversification by investing in projects operating in different sectors. For example, you might have investments in smart contracts, decentralized finance (DeFi), exchange protocols, scaling solutions, and gaming (Gaming and GameFi).

Another approach to diversification is to spread your investments based on project capitalizations (large-cap, mid-cap, or small-cap projects). Mix established projects with emerging ones. Well-established crypto-assets like Bitcoin and Ethereum can offer relative stability, while newer projects may have higher growth potential. The table below illustrates an example of a diversified portfolio by capitalization: …

This text is an excerpt from the book “INVESTING IN CRYPTOCURRENCIES” written by Eudes Djembo.

We invite you to read the following article: “Mastering Emotions: The Key to Success in Crypto Investment.”