Crypto risk management: position sizing, leverage and liquidation

The most common rule caps the possible loss on a position at a small share of capital, often 1% to 2%. The size then follows from the distance to the exit point: accepted risk ÷ stop distance.

With $10,000 and 1% risk, or $100: a stop 5% below the purchase price allows a $2,000 position, a stop at 20% a $500 position. On an asset as volatile as bitcoin, tight stops are hit by everyday noise; wide stops require smaller positions.

For a long-term investor without a stop, the same logic applies at portfolio level: what total decline can you go through without selling? The answer sets the share to expose.

Between the top of 8 November 2021 and the end of 2022, a 100% bitcoin portfolio lost up to 77%. With 50% bitcoin and 50% dollars, rebalanced every month, the maximum drawdown falls to 48%. With 25% bitcoin, to 27%. Reducing exposure does not change the market’s direction; it changes what you have to absorb.

Leverage increases the size of the position without increasing capital. It multiplies gains and losses, and adds a risk the unleveraged position does not have: liquidation, meaning the position is closed automatically when the loss approaches the collateral.

A bitcoin purchase on 28 March 2022, at $47,122, shows the gap. At ×10, the position is liquidated on 8 April. At ×5, on 30 April. At ×2, on 13 June. Without leverage, it loses up to 63% over the period, but stays open and benefits from the later rebound. With leverage, a temporary loss becomes permanent.

Spreading a portfolio across several cryptocurrencies gives an impression of diversification. The numbers temper it: since mid-2018, the 90-day correlation between the daily returns of bitcoin and ether has averaged 0.83, and has never dropped below 0.55, on a scale where 1 means they always move together.

It rises during crises, precisely when diversification should help: 0.94 in mid-April 2020 after the March crash, 0.92 in mid-June 2022 after Terra’s collapse, 0.88 at the end of November 2022 after FTX. On 7 October 2026, it stands at 0.87. To reduce the risk of a crypto portfolio, the share of crypto in the total matters more than the number of cryptos held.

Even a good strategy strings losses together. With one winning idea in two, the probability of losing five times in a row is about 3%. Over a few hundred positions, such a run becomes almost certain.

This is what the 1% rule protects against. Ten losses in a row at 1% leave 90% of capital; at 10% per position, 35% is left. Climbing back costs more than falling: after a 50% loss, it takes a 100% gain to return to the starting point.

A stop at a fixed distance, 10% for example, treats every asset the same way. Yet an altcoin can move 10% on an ordinary day when bitcoin moves 3%.

The ATR measures the average range of recent moves. Placing the stop at twice the ATR below the entry price adapts the distance to the asset, and the sizing formula does the rest: the more volatile the asset, the wider the stop and the smaller the position. The risk in dollars stays the same from one position to the next.

Three limits are enough for most strategies. The maximum share of crypto in your wealth, set from the decline you can go through. The maximum share of any single asset other than bitcoin. The maximum leverage, and for many investors the right answer is none.

Write them down before you need them, and check them after every strong rise: that is when winning positions quietly outgrow their planned size.

The examples in this guide are historical, before fees and taxes. They are not investment advice.