How to Assess Your Risk Appetite for Crypto Investments

The cryptocurrency exchange is a relatively new asset for investors today. It is why the market behaves so erratically despite some of the success stories that have been circulating. The growing prominence of altcoins has nevertheless coaxed more investors—both old and young—to consider adding this to their portfolio.

Before taking your Monero wallet or other digital wallet of your choice to the crypto exchange, it is worth noting that this asset may not be right for those who are afraid to take risks with their money. While this is understandable, it stands to question how an investor determines if they are ready for the risks of crypto investments.

Here are some important points to know when determining your risk appetite for your potential asset.

What Affects Risk Appetite?

There are good reasons why individuals have varying risk appetites, and it often has to do with their circumstances, influenced by three main factors.

Financial Capability

Financial capability must come before anything else since it decides whether someone should be investing in the first place. Most tenured investors often take from a surplus in their savings, or they have a portion of their funds that they are ready to lose. Conversely, others may be betting with living expenses, relying on potential returns to get by.

Ideally, investors should be using money that they are prepared to lose at any moment, but some people may feel that they have no choice. This only means that financial capability directs a person towards what types of investments to take on and which assets to choose.

Investment Timeline

This has more to do with an investor’s financial goals since not everybody is placing their money into markets for the same reasons. There are those trying to catch the split-second highs and lows of exchange prices, while others plan to let their money do the work by growing it over time. Essentially, financial goals determine whether investments are short-term, mid-term, or long-term.

These goals can be affected as well by financial capability since some people do rely on their investments for certain living expenses, but it can also be related to a person’s life plans. Whichever it is, these goals must be specific and measurable for a practical risk assessment.

Emotional Capacity

As with anything else, each person has a different way of coping with loss, and this does play heavily into one’s capacity to start investing. Those who can manage themselves amidst losses—or are calm and patient about their investments—tend to be the most likely to become successful investors. They are prepared to endure the volatility of some markets and remain firm that the returns will come.

On the other hand, there are those who have a difficult time coping with loss, even if it is not financial. These people would have to be a lot more discerning of their assets and which markets they decide to engage in.

Different Levels of Risk Appetite

Knowing the factors that play into risk appetite, discerning investors can understand where they are coming from, and they can assess themselves for how they approach risk. There are three levels of risk appetite.

Conservative Risk Appetite

These investors are the most averse to risk, so they can be very reluctant and selective when considering a new investment. While it might be easy to assume that anyone without a surplus of finances immediately falls under this level, those with more money to spend could also be just as conservative, such as those who have retired and are living without a regular income.

The investment options of conservative investors tend to be those with minimal growth but have steady, consistent returns over a long time. Unfortunately, these individuals are not suited to invest in crypto due to the market behavior being the exact opposite of what they can handle.

Moderate Risk Appetite

This level of risk appetite lies somewhere in between the skeptical and the adventurous crowds. They are willing to accept a certain extent of risk, but they balance their more volatile assets with safer ones that have more consistent returns. Usually, their financial timelines span roughly a decade.

At this level, investors can put a hand into the cryptocurrency market, but they are better off with only the most popular coins. While popularity and high market cap do not guarantee huge returns, the growth in value for these altcoins fits well into the goals of moderate risk appetites.

Aggressive Risk Appetite

Simply put, aggressive investors are not afraid of much when it comes to placing their money into various assets. This does not necessarily mean that they invest in just about anything, rather they are often—though not always—the most researched and experienced investors. They do not mind supporting new businesses and industries, and they are prepared to lose a lot for the long haul.

These investors are best suited to the crypto market for more than just the top altcoins. This market is perfect for them because of its volatility and its potentially high returns, despite the equally high risk. Aggressive investors are perhaps the most prepared to watch out for a coin’s highs and lows while keeping up to date on all news that influences cryptocurrency.

Whichever risk appetite an investor has, it is always important to factor this into any financial decision. Especially in this case, conservative investors may feel left out by missing the crypto investment craze, while aggressive investors may place their money on any digital coin. More than anything, investments should always come from responsible choices and proper research. Investors stand to regret a lot more if they play their assets haphazardly.

 

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