🔎How to manage risk
Folks Finance is the leading cross-chain DeFi lending protocol. Explore what makes it stand out.
Nothing is worse than making it, only to lose everything shortly after.
Unfortunately, there are many such cases.
Many people who were flexing their new Lambos and Rolexes at the end of the last cycle eventually ended up losing all their profits in the bear market.
Losses are part of the game, but you should never get wiped out.
With this in mind, I decided to write this newsletter.
I will share a few rules I have and tips that I find helpful to minimize losses and make sure you’ll never lose everything because of a stupid mistake.
Let’s dive in 👇
Create an exit plan for every scenario
The difference between a gambler and an investor is a plan.
If you buy a token hoping it will go up, but without having a predefined plan for when you’ll take profit/cut losses, you’re doing something wrong.
Why am I saying this? Because when you don’t have a plan, it’s very easy to fall into the trap of letting emotions take over. This will only lead you to make bad decisions.
These are the things I typically write down for every new position:
Why I opened it (e.g., because of an upcoming major tokenomics upgrade that could bring new buyers)
When to cut losses (e.g., I’ll sell the token I bought if it is constantly underperforming BTC for the next month, or if the project starts losing a significant amount of market share in its sector, or loses mindshare on CT)
When to take profits (e.g., I’ll take profits when I turn bearish on BTC - because if BTC goes down, all altcoins will follow - or when that token I bought reaches a certain price target where I decided in advance to sell)
Maximum holding period (e.g,. if I believe a bear market is likely to start in 2 months from now, then it doesn’t make sense to hold it for more than 2 months)
This is just an example. You can adapt a plan like this based on your time horizon, risk profile, and type of trading or investing you do.
The point is that regardless of what your strategy looks like, you should have a plan.
Act quickly to protect your capital
The problem that a lot of people have is that they act too fast when capitalizing on new opportunities and too slow when they need to protect their capital.
I myself faced the same issue many times in the past.
For example, in 2021, when the UST stablecoin started collapsing and initially dropped to $0.95, I considered selling but ultimately decided to wait and see how things unfolded rather than take a small loss.
Being complacent and not taking action to sell at a small loss cost me a good amount of money.
This can also apply to trading or withdrawing funds from an exchange.
If your timeline is filled with FUD about a platform (CEX or on-chain app) where you have deposited your money, withdraw your funds ASAP, even if you’re not sure the FUD is justified. You never know which app is the next FTX or Stream DeFi.
Or if you invested in a token that keeps going down and you no longer believe it’s a good investment, don’t just keep holding it, hoping it will go back to breakeven one day. Sell it and invest the remaining funds in a better opportunity.
Selling at a loss feels hard because we don’t want to admit we were wrong.
But just because a token is down 90%, it doesn’t mean it can’t go down another 90%.
Doing little things like this, which might seem obvious but few people actually take into account, will save you a lot of money.
Before we continue, here’s what you should know about Folks Finance, a cross-chain DeFi hub:
Together with Folks Finance
The leading cross-chain DeFi lending protocol
Folks Finance has been on a massive win streak lately.
Folks started as a lending app on Algorand and has since evolved into a cross-chain DeFi hub aiming to solve one of DeFi’s biggest issues: liquidity fragmentation.
Using it, users can finally borrow funds on one chain with the collateral deposited on another chain, with no bridging being required.
And since its token FOLKS launched last month, it’s been one of the best performers.
Here are a few of the major recent developments related to it:
Folks’ Points Season 2 just went live, introducing new ways to earn, such as repaying Interest, swapping via Folks Router, and using flash loans
FOLKS, the utility token of the project, is up over 7x since its TGE on Nov. 6 and became a top 3 lending token in the EVM sector by FDV
Folks Mobile, a regulated app designed to bring DeFi to the mainstream by abstracting all crypto complexities, has been confirmed to launch in 2026
On top of all of this, FOLKS also got listed on Bybit Futures, and a staking mechanism rewarding FOLKS stakers with 30% APR went live.
Folks is backed by some of the biggest names in the industry, including Coinbase Ventures, Jump Crypto, and ParaFi Capital.
Check out what Folks Finance is building today!
Concentrate, don’t overdiversify
I've shared this advice so many times, yet I still see dudes holding 30 different coins at once.
Diversification is good, but overdiversification isn’t.
For me, the maximum number of tokens I hold at once is 7-8.
The reason why I don’t recommend holding more than that is that chances are you’ll not be able to manage risk properly for a very large number of positions.
When you invest in dozens of different projects, it’s very hard to keep an eye on all their developments and make the right decision regarding when you should sell.
If there are 20 tokens you like, consider investing only in your top 7-8 picks that you believe have the highest chance of performing well.
And most importantly, wait for the right trades and don’t rush to deploy your capital.
When the market conditions are very rough and almost every single asset is going down, I don’t think it’s a good idea to deploy your capital into the market.
In my experience, the best time to invest is when there’s a major upcoming market catalyst that gets a lot of people excited and the market starts showing strength.
For example:
In Sept. 2023, the massive hype around the upcoming spot BTC ETFs (which launched on Jan. 11, 2024) caused BTC to surge from $27k to over $44k in months
Earlier this year, ETH surged from $2.4k to $4700 because of the excitement created by the newly announced ETH treasury companies that bought many billions of dollars worth of ETH
People love to invest in assets with a good story/narrative. It’s as simple as that.
Decrease your risk tolerance as your portfolio grows
If you have a few thousand dollars to your name and no financial responsibilities (no family who depends on you), I don’t think it’s necessarily a huge issue if you take high risks with most of your money.
But as you start making more money and your portfolio grows to a significant size, my advice is to allocate more and more of it to lower-risk investments.
This can include stablecoins (for yield farming, for instance), traditional index funds, gold, or BTC if you have a long time horizon.
Yes, I know, it sounds boring. But once you have significant capital (e.g., 6-7 figs), I believe it’s wise to focus more on preserving it than on making more.
I’ve seen this happen over and over again:
A person hits the jackpot with an investment/airdrop/something else that changes their life financially, and instead of securing some profits, starts taking more and more high risks. At some point, they run out of luck, and all the money initially made is gone.
We don’t like to acknowledge it, but luck plays a huge role in trading, investing, and business, and hard work is not the only reason some people succeed.
Once you've grown your portfolio to a significant value, think about this and don’t be greedy.
It’s absolutely fine to keep taking risks to grow your portfolio further, but the top priority at that point should be protecting your capital over making more money.
Limit your exposure to every platform and investment
The only way to thrive in financial markets is to be prepared for the worst.
No protocol is too safe to be exploited. No bank is too big to go bankrupt. No project/business is too big to fail.
With this in mind, I generally try to stick to these rules:
Don’t deposit more than 10% of my portfolio into a single DeFi app/CEX
Don’t have more than 15-20% portfolio exposure to a single token (unless it’s BTC)
Don’t hold all savings in a single currency or stablecoin (e.g. better to hold USDT + USDC than just USDT, especially given the lack of transparency regarding USDT backing)
Don’t hold all funds in a single wallet (What if you accidentally sign a malicious transaction with one of your wallets and it gets drained? Having funds across multiple wallets will minimize your losses in this scenario)
Don’t trade with leverage using more than 20% of my portfolio as collateral
Speaking about leverage, I believe 95% of people should stay away from it. Using it makes sense only in two scenarios, in my opinion:
You’ve already been highly profitable trading spot for at least a few months, and you now want to try trading with leverage using the same strategies
You want to farm perps airdrops with a delta-neutral strategy (but even if you’re opening only delta-neutral positions, you should be careful not to be liquidated during major pumps/market crashes)
I covered a few tips to minimize risks when farming perps airdrops in the second half of this newsletter:
If you don’t find yourself in any of the above scenarios, my advice is to avoid leverage.
Closing thoughts
The reality is that most people on CT (especially the ones with the biggest audiences) will always encourage you to take bigger risks and be more bullish.
The reason is simple:
Bull posts are the ones that get the most engagement and generate the most money. Most influencers on CT don’t actually make money from crypto investing or trading, as most of their earnings come from the private deals they get due to selling you the dream of getting rich quickly.
So the next time you feel FOMO because of your CT timeline, remember that.
The only way to survive (and thrive) in financial markets is to have a set of solid risk management rules you follow and prioritise survival over making more money.
Protect your capital as your life depends on it, and don’t make emotional decisions.
I genuinely hope you’ll make it one day.
Until next time,
The DeFi Investor