Understanding Risk Tolerance in Crypto Investing: A Complete Guide

risk tolerance

If you haven’t yet gotten into the crypto craze, it only takes some self-examination and research to get started on your wealth journey. It’s a journey that plenty of people are taking as of late.

Roughly 21% of people in the United States have purchased crypto before. Before you can find success investing in crypto, you need to take an honest assessment of your risk. Read our guide below to learn all about your crypto risk tolerance.

The Importance of Risk Tolerance in Investing

Are you a risk taker or a conservative investor when it comes to cryptocurrency investments? Knowing your own risk tolerance is an important first step toward success.

Having risk tolerance is essential for any type of investing, not just crypto assets. It’s important to know your risk tolerance whether you’re investing in the crypto market, stocks and bonds, gold, or real estate.

It lets you know how much money you can invest and what you can afford to lose. Your risk tolerance is a fluid situation. During certain years, you might have more capital you can risk, and life changes can dictate that you invest less during other years.

Never forget, all investment involves risk, and without risk, there’s no reward.

Identify the Balance Between Risk and Opportunity

So, how can you strike a balance between risk and opportunity? Identifying your investment risk profile is a vital step in striking this balance.

Look for ways to minimize risks while still keeping an eye out for high-reward investments. Putting in the proper research will help you take calculated risks while minimizing potential losses.

Understand Your Goals and Appetite for Risk

Outlining your goals will help you understand your appetite for risk. The best goals help you financially while also advancing your life as a whole.

What are you hoping to accomplish with your crypto investments? Know the dollar amount or purpose for each fund that you create.

For example, you might be looking to purchase your first home, and stringing together some quality crypto investments can get you a down payment. You might also be using your crypto as a retirement nest egg.

Each goal comes with a different timetable, level of necessity, and risk factors. Find strategies that are best for you. Set goals with intention so you can create a working strategy.

Develop a Plan of Action That Fits Your Tolerance Level

Create a plan of action that fits what you’ve learned about your goals and risk tolerance. Some things you should examine when creating your plan include:

Study the market to get an idea of how you should execute this plan. Research some crypto hedge fund investors and learn what strategies have worked for them through the years.

Diversify Your Crypto Portfolio

Diversification is one of the most important steps for any investor. Crypto is a market that creates plenty of opportunities for diversification.

This alone can help eliminate a lot of your risk.

Before diversifying your entire portfolio, start with your crypto investments so that you have a good mix. You might start with Bitcoin, which has been a standard-bearer since 2009, and then branch out into tokens that are less proven, with plenty of upside.

One way to reduce your risk of portfolio loss is to spread it out. Don’t just focus on one asset or currency – instead, try investing in different kinds of cryptocurrencies and across multiple strategies, like trading, liquidity pooling, and staking.

Consider the right mix of different crypto assets for your portfolio. For example, if you want to dabble in DeFi (decentralized finance) coins and tokens, then allocate a certain portion of your funds accordingly.

Losses are also a reality for many investors, and diversification helps to curb these losses. Evaluating short-term and long-term risks can help with your financial goals.

Hone Your Investor Personality

Know yourself outside of investing and it’ll help inform and shape your investor personality.

Are you a passive investor who prefers to buy and hold for the long term, or are you an active trader who is constantly monitoring trading charts in search of potentially profitable trades?

Consider your psychology and your risk tolerance in every other part of life so that you can figure out what works best for your crypto portfolio.

Budget for Your Risk Tolerance

Once you have an idea of how you want to proceed, make sure that you set an investment budget that fits your risk tolerance.

After you have calculated your risk capacity, determine the amount of risk you are comfortable with in relation to potential profit margins. This level should reflect both your feelings about volatility and the need for returns.

Create a plan that limits the amount of money you put into any one purchase and the total capital you allocate to all trades. Remember—the higher the risk, the larger rewards may be, but it’s important to ensure that your risk tolerance is not exceeded by setting and sticking to a buying power limit.

Monitor Your Portfolio for Changes in Risk Levels

Once your portfolio is in place, track it regularly for changes. By monitoring overall asset allocations, you’ll be able to identify any shift from the plan that could increase your risk levels.

Different crypto coins will have different risks associated with them. These risks extend past financial as well. A new blockchain may protect data more securely than an existing one, for instance.

Don’t get too attached to any one cryptocurrency as its risk can change quickly and drastically over time.

Stay Up-to-Date With All of the Coins

Always make sure that you’re well-researched before entering the crypto market.

Calculating your risk tolerance can help you decide how much of your portfolio should be devoted to high-risk, high-reward investments like crypto. Consider the financial goals that you have for yourself and the length of time you are planning to stay in the market.

Different types of investors—those saving for retirement, or a major purchase, for example—may have different risk appetites. Make sure to choose investments based on an assessment of your own personal risk tolerance.

Research the newest and greatest crypto offerings as well so that you don’t get tunnel vision.

Some unique forms of cryptocurrency that you might not know about include:

Subscribe to websites and publications that provide advice that keep you up-to-date. Register for courses from experts, and use all of the resources that you have access to. You might choose to reach out to a financial advisor that understands crypto so that you can get leads and advice on the best investment opportunities.

Generally speaking, you need to be aware of the different classifications of risk when it comes to crypto investing. For example, there are market risks. These risks involve things like changes in the value of a crypto asset due to market conditions.

You might also run into liquidity risks, or may be facing some difficulty selling large volumes of crypto assets due to a lack of buyers. Understand the implications that come with different types of risks so you can manage them with informed decision-making.

Research the Rest of the Crypto Space

Take the time to study blockchain as a whole and not just individual cryptocurrencies. You might look into things like non-fungible tokens (NFT) and other decentralized tokens.

Research is key when exploring these new territories and controlling risk. Investors often don’t research enough before jumping into a particular asset or currency.

Learn the auxiliary issues related to any given asset. This means things like analyzing regulations and comparing exchanges. Gaining an understanding of the influence each investment has and how this affects the market and support it receives.

Diversify Across Assets and Strategies

Outside of diversifying your crypto portfolio, make sure that you’re diversifying your entire wealth portfolio. This decreases your reliance on any single crypto investment and offers you the protection you need.

Learn all you can about the stock market, buy shares of some exchange-traded funds (ETFs), and secure your retirement with Roth Individual Retirement Accounts (IRAs) and other funds. Invest in some real estate property and learn as much as you can about precious metals.

Invest in Crypto Wisely

Your risk tolerance will dictate a lot about how you handle your investments. This guide will help you start down the right path with crypto.

Truecode Capital can help you when you’re trying to get into crypto and need to get up to speed. Send us a message on our contact form to learn more.

Learn More: Take the crypto quiz

Take a three-minute quiz to learn how to become a more confident crypto investor.

When you take the quiz, you’ll get a 15-page PDF report summarizing your qualifications:

  • Do I understand my wealth objectives?
  • Do I have the knowledge to confidently invest in crypto?
  • What is the impact of crypto investing in my portfolio?

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