Managing risk when trading and investing in cryptocurrencies

What is crypto risk management?

Risk management in cryptocurrency involves using deliberate strategies and tools to help control your exposure to potential losses while you pursue opportunities in digital assets. The goal isn't to eliminate risk entirely – that's impossible with any investment – but rather to understand, measure and manage your exposure to market movements in a structured way.

With IG, you can participate in crypto markets in two distinct ways, each with different risk profiles:

1. CFD trading: trade contracts for difference (CFDs) on cryptocurrency price movements through the IG platform. You're speculating on price changes without owning the underlying asset, using leverage to control larger positions. Your profit or loss depends on whether the market moves in line with your prediction. Importantly, losses can exceed your initial deposit when trading CFDs. CFD trading is offered through IG Australia Pty Ltd.
2. Buying and selling crypto¹: once the IG Markets app launches, you’ll be able to buy and own actual cryptocurrency through the app. Using your account, you’ll purchase Bitcoin, ether or other digital assets directly, with no leverage involved. Your investment value moves with the market, but you can't lose more than you invest. This approach suits those wanting straightforward crypto ownership without the complexity of leveraged trading. Crypto trading is offered through IG Digital Assets Australia Pty Ltd , which is registered with AUSTRAC and is separate from other IG Group entities including IG Australia Pty Ltd.

Both approaches require thoughtful risk management, just applied differently.

Why does risk management matter for crypto?

Cryptocurrency markets present unique characteristics that make risk management important regardless of how you participate.

Round-the-clock volatility

Unlike traditional stock markets that close overnight and on weekends, crypto markets never sleep. Bitcoin, Ether and other digital assets trade continuously, 24 hours a day, seven days a week.² This means significant price movements can occur while you're away from your screen – during your commute, while you're sleeping or over the weekend.

Rapid price movements

Cryptocurrency prices can shift dramatically in short timeframes. A regulatory announcement from a major economy or a technical issue with a blockchain network can trigger substantial price swings within minutes or hours. Whether you're trading or investing, these movements can affect your positions.

Market sentiment drives prices

Cryptocurrency markets can be particularly sensitive to shifts in sentiment. News about regulatory changes, institutional adoption, technical developments or security breaches can rapidly change market psychology and drive significant price action.

The impact of these factors varies depending on how you're participating in crypto markets. For CFD traders, leverage amplifies both gains and losses. For those buying and selling crypto through the IG Markets app, price volatility directly affects your holding value but you're protected from losing more than you put in.

Risk management for crypto CFD trading

When you trade cryptocurrency CFDs on the IG platform, you're using leverage. This means you only need to deposit a percentage of the full position value to open a trade. While this can magnify potential profits when markets move in your favour, it equally magnifies potential losses when they don't. A 10% adverse price movement on a leveraged position could potentially wipe out your entire initial deposit – or more.

Here's how you could manage these risks effectively.

Position sizing

Position sizing determines how much of your trading capital you allocate to a single trade. Many experienced traders keep individual positions to between 1% and 5% of their total trading capital. This approach means that even if several consecutive trades move against you, you could still have sufficient capital to continue trading and potentially recover.

For example, if you have $10,000 in your trading account and limit each trade to 2% risk, you're risking $200 per trade. Even if you experience five losing trades in a row, you'd still have 90% of your capital intact.

The mathematics of position sizing could work in your favour over time. Preserving capital during losing periods means you need smaller percentage gains to recover. If you lose 50% of your capital, you need a 100% gain just to break even. But if you lose only 10%, you need just an 11% gain to recover.

Stop-losses

A stop-loss is an order that automatically closes your position when the market reaches a specified price level. This tool helps you define your maximum acceptable loss before entering a trade, rather than making emotionally-charged decisions while a position is moving against you.

When setting stop-losses, consider the natural volatility of the cryptocurrency you're trading. Bitcoin might routinely fluctuate 3-5% in a day during normal conditions, while smaller cryptocurrencies might see even larger swings. Setting your stop-loss too tight could result in being stopped out by normal market noise, while setting it too wide might expose you to larger losses than your risk tolerance allows.

Guaranteed stops

Standard stop-losses work well in most conditions, but cryptocurrency markets can sometimes 'gap' – jumping from one price level to another without trading at prices in between. This typically happens during periods of extreme volatility or when markets reopen after maintenance periods on some platforms.

A guaranteed stop³  ensures your position closes at your specified stop level, even if the market gaps past it. You'll only pay for this protection if it's triggered.

A guaranteed stop can be particularly valuable in crypto markets, where weekend gaps or sudden news events can create price discontinuities that standard stops might not protect against effectively.

Risk-reward ratios

Before entering any trade, consider the potential profit compared to the potential loss. This is your risk-reward ratio.

Many traders aim for risk-reward ratios of at least 1:2, meaning they're targeting potential profits that are at least twice the size of their potential losses. Some pursue even more favourable ratios of 1:3 or 1:4.

Why does this matter? With a 1:2 risk-reward ratio, you could be profitable overall even if only 40% of your trades are winners. The larger winners more than compensate for the smaller, more frequent losses. This mathematical edge can be the difference between profitable and unprofitable trading over time.

Leverage management

Leverage is a powerful tool that requires careful handling. When you're new to crypto trading, or trading a new strategy, consider starting with lower leverage ratios until you understand how different levels of leverage affect your position's sensitivity to market movements.

Even experienced traders often use different leverage levels for different market conditions. During periods of high volatility, reducing leverage provides a buffer against extreme price swings. During calmer conditions, they might be comfortable with slightly higher leverage.

The most appropriate leverage level depends on your risk tolerance, trading strategy, market conditions and experience level.

Risk management for buying and selling crypto

When you buy cryptocurrency through the IG Markets app, you're taking direct ownership of digital assets without leverage. This fundamentally changes your risk profile – you can't lose more than you invest, which removes the amplified downside risk that comes with CFD trading.

However, crypto markets remain volatile and thoughtful risk management still matters. Here's how you could approach it.

The no-leverage advantage

When buying crypto, what you see is what you get. If Bitcoin is trading at $60,000 and you buy $1,000 worth, you own approximately 0.0167 BTC. If the price drops 20% to $48,000, your holding is worth $800. If it rises 20% to $72,000, you're up to $1,200.

Crucially, even if Bitcoin were to drop to zero (an extreme scenario), you'd lose your $1,000 – nothing more. There's no risk of your losses exceeding what you put in, no margin calls or forced liquidations. This makes buying and selling crypto more straightforward to understand and manage, particularly if you're new to cryptocurrency.

How much you should invest

Just because you can't lose more than you put in doesn't mean you should put everything into crypto. Many experienced participants follow the principle of only buying what they can afford to lose, particularly in volatile asset classes like cryptocurrency.

Consider keeping your crypto allocation to a proportion of your overall portfolio that you're comfortable with. Some people keep it to 5–10%, others go higher. The right level depends on your financial situation, risk tolerance and goals.

Dollar-cost averaging

Rather than investing a lump sum all at once, dollar-cost averaging involves investing smaller amounts regularly over time – weekly, fortnightly or monthly. This approach helps smooth out the impact of volatility.

When prices are high, your regular investment buys less cryptocurrency. When prices are low, it buys more. Over time, this can result in a lower average purchase price than trying to time a single large investment.

This strategy also removes the pressure of trying to pick the 'perfect' moment to invest, which even experienced market participants find difficult with volatile assets like cryptocurrency.

Portfolio diversification

The IG Markets app offers Bitcoin, Ether, Solana and other popular cryptocurrencies. Rather than putting everything into a single asset, consider spreading your purchases across different digital assets.

Different cryptocurrencies don't always move in perfect correlation. While bitcoin might be declining, certain other digital assets might be rising based on specific developments in their ecosystems. Diversification helps reduce the impact of any single asset's performance on your overall crypto holdings.

Beyond crypto, you might also consider how your digital asset purchases fit within your broader portfolio across shares, ETFs or other assets.

Time horizon

Cryptocurrency markets can be extremely volatile in the short term. Prices that swing dramatically week to week might show different patterns over months or years. Many successful crypto holders take a longer-term view, reducing their concern about short-term price movements.

If you're buying rather than trading, consider whether you're prepared to hold through periods of volatility. Having a clear time horizon – whether that's one year, three years or longer – can help you maintain discipline during market turbulence.

Regular portfolio reviews

While buying and holding generally means less active management than trading, it doesn't mean ignoring your crypto entirely. Consider reviewing your crypto holdings periodically – perhaps monthly or quarterly.

These reviews can help you understand how your holdings are performing, whether your original reasoning still holds and if any rebalancing might be appropriate. Market movements can shift your portfolio allocation over time and periodic reviews help you stay aligned with your goals.

Psychology and discipline in risk management

Whether you're trading CFDs or buying and selling crypto, emotional discipline matters.

Planning trades before entering

One of the most effective risk management practices is deciding your approach before you trade or buy. For traders, this means defining your entry point, stop-loss level and target profit. For those buying crypto, it means deciding how much to put in, whether you'll dollar-cost average and what would prompt you to sell. 

This planning happens when you're objective and not in the heat of the moment when money is at risk.

Avoiding revenge decisions

After a losing trade or when your investment drops in value, the temptation to immediately make another decision to 'win back' the loss can be strong. This revenge mentality often leads to poor decision-making, as decisions are driven by emotion rather than analysis.

If you experience a loss, particularly a significant one, consider stepping away before making your next move. Ensure your next decision is based on your trading plan or investment strategy, not on emotional reaction. 

Keeping records

Recording your trades and investments – including your reasoning, position sizes, outcomes and lessons learned – creates a valuable record for review. Over time, you might identify patterns in what works for your approach and where your risk management could improve. 

Risk management tools across IG platforms

• Stop-loss and limit orders: set predefined exit points for both losses and profits. Once set, these orders work automatically, executing when the market reaches your specified levels.

• Guaranteed stops: available on select markets, guaranteed stops³ ensure execution at your specified level regardless of market gaps or volatility. The premium for this protection is only charged if the guaranteed stop is triggered.

• Price alerts: set notifications to inform you when markets reach specific levels. This allows you to monitor multiple cryptocurrencies or key technical levels without watching charts constantly. However, alerts are for information use only. For managing existing positions, still consider using stops and limits.

• Charts and technical indicators: access professional charting tools with technical indicators that can help identify potential support and resistance levels to inform your stop-loss placement and profit targets. Available indicators include moving averages, Bollinger Bands, RSI, MACD and many others.

• Demo account: practice implementing your risk management strategies without risking real capital. Our demo account provides access to live market prices and the full range of risk management tools.

For buying and selling crypto (IG Markets app):

• Real-time portfolio tracking: monitor your cryptocurrency investments at a glance, seeing exactly how your holdings are performing.
• Complete transaction history: track every purchase and sale, helping you understand your investment patterns over time.
• Price alerts: set notifications for price levels that matter to you, helping you stay informed without constantly checking the app.
• Secure storage: An insured, enterprise-grade Qualified Custodian holds the vast majority of our clients’ digital assets in cold storage. 

FAQs about crypto risk management

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Footnotes: 
¹ IG Digital Assets Australia Pty Ltd (ABN 686 210 462) is registered with AUSTRAC as a Digital Currency Exchange provider. Cryptocurrency trading is highly speculative and volatile. The cryptocurrency market is unregulated and you do not benefit from Investor protections available for regulated financial products. Cryptocurrencies are not covered by the Australian Financial Complaints Authority (AFCA) scheme. You may lose all of your investment. The purpose of this website is solely to display information regarding the products and services available on the IG Markets App. It is not intended to offer access to any of such products and services. You may obtain access to such products and services on the IG Markets App. The information on this website does not take into account your objectives, financial situation or needs. You should consider whether cryptocurrency trading is appropriate for you in light of your circumstances and seek independent financial advice before deciding to trade.
² With IG, you can trade cryptocurrencies from 8am on Saturday, and is available to trade until 10pm on Fridays (UK time).
³ You’ll pay a small premium only if your guaranteed stop is triggered.