Web3 Risksand How to Manage Them
While Web3 technologies appear to have a lot of potential from an investment perspective, investors should understand that Web3-related assets are higher risk.
This is an emerging asset class, and as a result, asset prices tend to be extremely volatile. This volatility needs to be managed carefully. Unfavourable price movements can result in significant losses for traders, especially if leverage is used on a trade. If you do not have sufficient funds in your account to cover potential losses, your positions may be automatically closed.
There are several ways to manage risk when investing in Web3 assets. One is diversifying your portfolio. This means spreading capital across a range of different assets in order to minimise security-specific risk.
This is where eToro’s Smart Portfolios can be helpful. Most Smart Portfolios offer exposure to a wide range of different assets and, therefore, provide investors with a high level of diversification. The DefiPortfolio, for example, provides exposure to 10 different assets involved in DeFi.
Another risk management strategy is to keep your exposure to Web3 assets small relative to your overall portfolio. One of the biggest mistakes novice investors make is allocating too much capital to cryptoassets. This can lead to large losses during crypto market downturns.
Generally speaking, experts recommend having no more than 5–15% of your overall portfolio invested in digital assets.
By keeping your exposure at this level, you can benefit when cryptoassets are rising while keeping losses small when crypto prices are falling. Stop-losses can also help investors to reduce risk. These help to minimise trading losses by closing out losing positions before large losses build up.
