When it comes to risk management, the number-one rule is understanding your risks. But before we understand them, we actually need to acknowledge them.
“Denial of risk refers to cognitive ways to develop adaption to risky behaviors by rejecting the possibility of suffering any loss.” –Peretti-Watel
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” -Mark Twain
What if the accumulated total of the bitcoin positions in the world were not based on random outcomes, but instead on scenarios known ahead of the position establishment?
What if the liquidation of that leveraged position could have been prevented?
What if the profit of a miner was locked one year out ,or 70% of the value of your portfolio was secured?
Then confidence would dominate the market and the next sell off would not have been as bad as the prior one.
Risk management is a vote of confidence in bitcoin.
Why? Because confidence is derived by known outcomes and known outcomes are an output of risk management.
Risk management is the answer to extreme volatile swings and lesser sell offs. The moment the downside is not detrimental to our portfolios or lives’ savings, is the moment that liquidations will be avoided and panicked selling will seize.
The moment everyone individually manages their risk is the moment that price normalization will be attained and confidence will be achieved in the broader market.
But how do we even approach risk management?
For starters, risk management begins with position placement and trade execution. Or by simply avoiding an overleveraged situation that you have absolutely no control over.
Risk management occurs by making sure that we do not engage in a trade that, if gone wrong, will threaten the financial wellbeing of ourselves and our families.
Risk management occurs when you put a stop loss on your leveraged position instead of doubling down or hoping that prices will return back to where they were.
Risk management occurs when you quickly realize that you are the one who is wrong, not the market, and accordingly adjust your exposure.
In a more moderate approach, risk management can be achieved through the derivatives markets, when you buy a put option in order to establish a maximum loss scenario or a minimum gain. Or simply when you sell some futures contracts for part of your physical position in order to protect your portfolio against nearby volatility and potential adverse market conditions.
Just like anything else in life, risk management should work as a damage-aversion mechanism, not as an aftermath solution. Our goal should always be to avoid our house catching on fire, not putting the fire out once it’s too late.
This is a guest post by Anestis Arampatzis. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
