Risk Management Strategy

18 Feb 2023

Spot trading can yield high returns, but it’s crucial to have a well-defined strategy in place before diving in. This entails analyzing the project, determining the size of your entry, and devising contingency plans in case of unforeseen circumstances.

In this article, we’ll discuss our approach to spot trading and share our insights with you.
Before entering the spot market, it’s critical to categorize the various assets available. With over 10,000 different projects to choose from, each with its own unique features, we sort them into three categories based on risk level:

High Risk: This category includes projects that are prone to exit scams or are high-risk due to their small capitalization. We pledge no more than 0.5% of our total capital to these projects since they pose a significant risk to our portfolio. However, if they perform well, we may see significant returns from just one high-risk transaction.

Middle Risk: Projects in this category have an average market capitalization of between $50 million and $500 million. We can pledge up to 1% of our allocated capital to these projects, which are less likely to collapse but still carry a degree of risk.

Low Risk: This category includes established mastodons of the cryptocurrency market with a high market capitalization, such as those in the top 50 of Coin Market Cap. We can pledge up to 3% of our allocated capital to these projects, as they are less risky but still carry some risk.
To diversify our portfolio, we allocate our capital as follows:

Cash reserves: 30%
High Risk: 15%
Middle Risk: 30%
Low Risk: 25%

While our portfolio may seem risky, we aim to earn returns rather than simply preserving our capital. However, in the current bear market, we adjust our strategy to focus more on cash reserves:

Cash reserves: 70%
High Risk: 5%
Middle Risk: 15%
Low Risk: 10%

With over 70% of our portfolio consisting of stablecoins, we can buy back into the market at more favorable prices during drawdowns.

In short, a risk management strategy should be tailored to each market. In a bull market, a riskier strategy with more high- and middle-risk projects may be appropriate, while a bear market calls for a risk-free strategy with a small percentage of high- and middle-risk projects and the majority in stable assets.
In summary, our risk management strategy for spot trading is designed to minimize losses and prevent undue stress. Consider using it as a starting point for developing your own strategy, and monitor its effectiveness over time.