Safe practices and a personal crypto risk framework
Apply DeFi-specific security habits and build a tiered allocation framework with position caps and a stress test.
What you will learn
- DeFi-specific security habits: separate wallets, token approvals and signature checks.
- How to sort crypto holdings into risk tiers with written caps.
- How to run a simple stress test on your crypto allocation.
- Which rules to write down and how often to review them.
Explanation
Common scams, seed phrases and a basic personal crypto plan were covered in the Bitcoin course. This lesson adds what changes once you use smart contracts, stablecoins and DeFi (decentralised finance).
Wallet separation
- Vault wallet: hardware wallet for long-term holdings; never connected to new or unknown applications.
- Working wallet: limited funds for protocols you have checked.
- Burner wallet: almost empty, for testing new sites, claiming airdrops or minting NFTs.
Approvals and signatures
A token approval (allowance) lets a contract move a token from your wallet. Many applications ask for an unlimited approval. If that contract is later hacked, it can drain the approved token, even years later. Approve only the amount you need and regularly review and revoke old approvals with a wallet's approval manager or a reputable revoke tool.
Some attacks use off-chain signatures ("sign this message") that grant permission to move tokens without a visible transaction. Read what you sign. If your wallet cannot decode a request, or shows "blind signing", do not sign. Prefer wallets that simulate the transaction and show which tokens will leave your wallet.
Address poisoning: attackers send tiny transfers from an address that looks like one you used before (same first and last characters), hoping you copy it from your history. Always check the full address, or use a saved address book, and send a small test amount first.
Risk tiers and caps
A risk framework is a set of written rules that limit how much you can lose in each type of exposure. Example structure (amounts are your choice, not a recommendation):
| Tier | Examples | Cap (share of crypto budget) |
|---|---|---|
| 1 | Large, established coins in self-custody or with a licensed custodian | up to 70% |
| 2 | Established protocols on the main chain, no bridge, timelocked upgrades | up to 20% |
| 3 | New protocols, bridged tokens, high yields, small tokens | up to 10% |
Add a single-protocol cap, for example 5% of the crypto budget per protocol, and a rule that the whole crypto budget is an amount you could lose completely without harming your financial plan. Crypto can lose a large share of its value quickly, and DeFi losses can be total.
Worked example
Hypothetical example: crypto budget €20,000. Caps: tier 1 70%, tier 2 20%, tier 3 10%, single protocol 5%. Current holdings: tier 1 €12,000, tier 2 €5,000 (all in one lending protocol), tier 3 €3,000. Fees and taxes ignored.
- Cap amounts: tier 1 = €14,000; tier 2 = €4,000; tier 3 = €2,000; single protocol = €1,000.
- Check: tier 2 holds €5,000 = 25% (over the €4,000 cap). Tier 3 holds €3,000 = 15% (over the €2,000 cap). The single lending protocol holds €5,000, five times the €1,000 cap.
- Stress test with assumed losses: tier 1 falls 60%, tier 2 loses 50%, tier 3 loses 100%.
- Loss = €12,000 × 0.6 + €5,000 × 0.5 + €3,000 × 1.0 = €7,200 + €2,500 + €3,000 = €12,700, which is 63.5% of the budget.
- Action: reduce tier 2 and tier 3 to their caps, spread tier 2 over several protocols, and confirm that a loss of this size is acceptable.
Common mistake
Practice activity
On paper: hypothetical crypto budget €8,000, caps 70% / 20% / 10%. Current holdings: tier 1 €6,000, tier 2 €1,200, tier 3 €800. (a) Which tier exceeds its cap and by how much? (b) You move the excess into tier 2. Is tier 2 still within its cap? (c) Run the stress test from the worked example (−60% / −50% / −100%) on the new allocation.
Show solution
Caps: tier 1 €5,600; tier 2 €1,600; tier 3 €800.
(a) Tier 1 holds €6,000 = 75%, which is €400 over its cap.
(b) Tier 2 becomes €1,200 + €400 = €1,600, exactly at its cap. Tier 3 is at €800, also at its cap.
(c) Loss = €5,600 × 0.6 + €1,600 × 0.5 + €800 × 1.0 = €3,360 + €800 + €800 = €4,960, which is 62% of the budget.
Limitations: in a real crisis, losses across tiers are linked and can be larger; the stress percentages are assumptions, not predictions. Moving funds out of the safest tier also increases risk, so selling part of tier 1 into cash is another option.
Key takeaways
- Separate vault, working and burner wallets, and keep new applications away from your vault.
- Limit and regularly revoke token approvals; never sign messages you cannot read.
- Write tier caps and a single-protocol cap, and check holdings against them on a schedule.
- Stress-test the whole crypto budget and keep it to an amount you could lose completely.
Next step
You have completed this course; the next course, "Day Trading & Intraday Execution", shows what trading within a single day really involves, from costs to execution and risk rules.
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