Everyone finds themselves somewhere along the line of risk tolerance. On one far side, the person who puts every satoshi and drop on their hardware wallet immediately and never moves it. On the other, some of the more wildly risky DeFi and leverage users that could land huge percentages - or loose everything in short order.
I find myself somewhere in the middle. While money in hand, in the form of cash or on a hardware wallet, is important for preserving wealth and having reserves, It's also true that money in hand or in hardware wallet will not compound. I have heard many people say that unless you can find a way to make money while you sleep, you'll be working "just a job" for the rest of your life. Because of that, my personal choice has been to put most of my crypto holdings into deposits to earn yields.
This is the important idea here. Money in your hand is safer, but does not earn a yield. When you put your money to use in a bank or other loan program, it becomes a deposit and you earn a yield. The yield is your payment for the risk you take that you may not get your money back if things go badly. Part of managing risk then means holding an appropriate amount of money which is not put in deposits so you can both pay your bills and avoid being wiped out should the worst happen.
This comes to the next point - be aware of which programs and companies you will put deposits with. There have been many stories about DeFi dapps which have had user funds taken because the smart contracts were written poorly and one bug or another was exploited by a hacker. Crypto as a whole also has it's own set of problems, where a few coins and businesses have been set up purely to be exit scams, where the owners/creators disappeared with investor/depositor funds never seen again. Fortunately we seem to have entered a second age of crypto, where there are plenty of legitimate choices and smart contracts are being audited by responsible programmers for errors and exploits. Still, as in any other market, buyer beware. Risk in this sense can be mitigated by only putting a small amount on deposit with a service that has not been around for long or which not many people are familiar with. Also, using several different services and having a deposit with each for a specific purpose and amount of money can mitigate risk also.
Yields payed out can be compounded, or profits taken off the table and put into a hardware wallet to increase reserves. I personally think it is a smart idea to take a portion of interest earned and put it in a hardware wallet or other personal wallet in order to increase personal reserves and financial resilience in the face of a wipe out. If you choose the DeFi and crypto businesses you work with carefully, the risk is low. But counterparty and smart contract risk can never be completely eliminated. There is a balance to strike here - on one side you can grow your overall wealth faster, but on the other your wealth becomes more stable.
The types of crypto that you invest in are also important. As I've written before, there are several different categories. I would suggest one or two hard money cryptos - the ones that have a fixed supply like the Bitcoins, XRP, Stellar, ZCash and others - that are more likely to hold value and won't inflate away like fiat 1.0 currencies or stablecoins probably will in the future. A staking crypto like Cardano or Tezos is also a notable exception to what I've outlined above, in that you can earn staking rewards but not have to put it in a deposit. At this point in time they are pretty secure savings accounts, and that is valuable.
