Why risk management matters more than returns
Regulators repeatedly warn that crypto markets are highly speculative and often operate on lightly regulated venues, so capital protection must come first. The CFTC stresses understanding platform risks and products before investing, while the UK FCA highlights that consumers should be prepared to lose all their money in cryptoasset investments.
Macro research adds context: the BIS points to structural vulnerabilities and speculative cycles in crypto and DeFi, reinforcing the need for robust risk controls.
Pillar 1 — Build a written risk policy and size positions by volatility
Position size should reflect current volatility, not intuition. A simple approach is to tie risk per trade to the Average True Range (ATR): risk per trade divided by a multiple of ATR determines the number of units, so stop distances expand or contract with market noise.
Avoid “betting the farm.” Academic and practitioner literature on the Kelly criterion shows that full-Kelly sizing is fragile under uncertainty; partial-Kelly sizing is commonly preferred to reduce the risk of ruin and drawdown volatility.
Define hard loss limits. The “risk of ruin” concept quantifies the probability that losses make recovery impractical; keeping per-trade risk small materially reduces this probability.
Pillar 2 — Control leverage, margin mode, and funding costs
Perpetual futures charge or pay funding to keep prices tethered to spot; holding positions through funding windows can erode P&L, so intraday traders should track timestamps and crowded positioning.
Choose margin mode deliberately. Isolated margin ring-fences collateral to a single position so a bad trade cannot drain the entire account; cross margin shares collateral across all positions. Many exchanges document these behaviors explicitly—use isolated margin by default unless you have a clear reason not to.
Pillar 3 — Trade where liquidity is real and execution is protected
Thin order books magnify slippage and stop-out risk. Recent market structure work shows a growing share of BTC depth concentrated on US venues, with depth conditions changing materially during stress events—plan entries and exits around genuine market depth, not just headline volume.
If you execute on-chain, protect orders from MEV. Using private/MEV-protected routes (e.g., Flashbots Protect or CoW Protocol’s MEV Blocker) can reduce frontrunning/sandwich risk and even rebate some backrun value. Combine this with tight slippage controls.
Pillar 4 — Separate market risk from counterparty and operational risk
Crypto held with custodians is generally not covered by deposit insurance; major venues state plainly that digital assets aren’t FDIC/SIPC insured (cash balances may have pass-through coverage at partner banks, but crypto itself does not). Treat exchange risk separately from market risk.
Proof of Reserves (PoR) helps—but has limits. Proper PoR pairs asset attestations with liability proofs (often Merkle-tree based) so users can verify inclusion; however, snapshots are point-in-time and may omit off-chain liabilities. Use PoR as one input, not a guarantee.
Harden account security. Prefer phishing-resistant authenticators and hardware security keys over SMS 2FA, which is vulnerable to SIM swaps—a risk underscored by high-profile incidents. Enable exchange-level protections like Master Key and Global Settings Lock where available.
Pillar 5 — Respect stablecoin, bridge, and platform risks
Stablecoins can depeg under stress. The USDC depeg around the SVB failure showed that even fiat-backed coins face issuer and banking-partner risk; BIS and central bank commentary continue to flag systemic and sovereignty concerns around stablecoins. Diversify rails and plan for depeg contingencies.
Platform risk is non-trivial: global theft totals remain large in 2025, with first-half losses surpassing $2 billion according to Chainalysis. Diversify custodians, minimize hot-wallet exposure, and rehearse withdrawal plans.
Pillar 6 — Process: expectancy, journaling, and governance
Evaluate setups by expected value, not feeling. A simple risk-reward framework—estimating win probability and payoff ratio—forces discipline and reveals whether fees, funding, and slippage turn a strategy negative. Journal trades in R-multiples to track edge persistence.
Codify governance: who approves leverage increases, when to reduce size after drawdowns, and when to stop for the day. This reduces impulsive decisions during volatility spikes.
A one-page risk checklist you can apply today
- Position sizing
Use ATR-based sizing and prefer partial-Kelly logic if you model edge; cap per-trade risk to keep risk-of-ruin negligible. - Leverage and margin
Track funding windows; default to isolated margin for new or high-vol strategies. - Liquidity and execution
Favor deep books; on-chain, route via MEV-protected endpoints and set tight slippage. - Custody and counterparty
Segment long-term holdings to self-custody; for exchanges, rely on recurring PoR plus hardware-key 2FA and settings locks. Remember crypto isn’t FDIC/SIPC insured. - Stablecoin and platform risk
Assume depegs can happen; diversify rails and test off-ramps. Monitor security headlines and rehearse response playbooks.
This article is educational and not financial advice.
