Many people are thinking about significantly growing their portfolios in crypto, but few consider the potential risks. So, how can we mitigate risk in the crypto market?
•Understand the Crypto Market Cycle.
Crypto moves in cycles, just like the rainy and dry seasons. If we set the wrong bias and enter the wrong season, our portfolio will not grow. According to the halving cycle calculations, we should be more vigilant in 2025 because since the bottom in 2022, crypto has rallied for three consecutive years.
•Proper Portfolio Management.
it is crucial to implement proper portfolio management and portfolio sizing. Bitcoin should remain the majority of the portfolio (50-70%). Other allocations should be smaller due to the potential for high risk and volatility, as well as Bitcoin's tendency to experience "solo rallies" when many other crypto assets are underperforming.
•Build a Cross-Asset Correlation Matrix.
It is important to look at the correlation heatmap between various crypto assets. Bitcoin and Ethereum typically have a strong positive correlation. RWA and layer-1 also have a correlation. By analyzing the correlation, we can determine the appropriate portfolio composition to avoid risk and build diverse diversification.
•Time-Based Diversification.
This approach can be implemented according to changing market conditions. For example, in a bull market, we can be aggressive with high-beta tokens, then rotate to stablecoins during a bear market. Or, we can rebalance to Bitcoin when the market tends to move sideways. This way, we have different strategies for changing market conditions.