A lack of consumer protection, highly volatile market, liquidity, and a myriad of scams. If there’s one thing that every crypto investor knows, it’s the fact that the crypto market is full of risks.
But then again, risks shouldn’t be a reason for you not to invest. All investments come with a risk. It should be pointed out that opportunity exists because there is a risk. These two aspects of investment go hand in hand.
The trading principle “the higher the risk, the greater the return” is also worth noting. And this can’t be any truer than in the investing in the crypto sector. If you know how to manage the risks and set up strategies to minimize exposure to these risks, there is a very lucrative opportunity in the crypto market for you.
Top Cryptocurrency Trading Risks
Below we take a look at some of the top risks in cryptocurrency investment.
Regulatory and legal issues
The lack of government involvement or central authority that controls the crypto market is a major obstacle to this investment tool. In case you lose your investment, there’s no avenue for redress and ultimately to recoup the losses.
Furthermore, without any coherent fiscal policy, there is always the risk of suddenly changing trading rules, taxation regulations, and even its legal existence. These uncertainties make the crypto sector a highly risky investment tool as compared to traditional asset classes. The lack of a solid legal basis puts cryptocurrencies at a shaky ground. In fact, some governments have been chasing down crypto traders while others are banning it altogether.
Cryptocurrency prices have been on a rollercoaster ride. After enjoying a meteoric rise in the final 2017, its value plunged in 2018. For example, Bitcoin peaked at $20,089 in the last month of 2017 but has since plummeted to $7,000 in the second quarter of 2018. The same erratic valuation is true across all other major digital currencies.
Expert fund managers and crypto investors at crypto index fund Cryptos Fund emphasized the volatility risk is something to be expected especially for new technology such as blockchain. They further stressed that diversifying your portfolio is vital to taper off this investment risk.
As of date, there are around 2,000 cryptocurrencies on the market although it’s impossible to give an exact number considering that digital currencies are being launched almost every day.
Over the past year, we’ve seen how quickly coins are launched and vanish. Analyzing and forecasting which cryptocurrencies have realistic and long-term potential is still incredibly difficult. This is especially true considering that there’s still no single real-world use of digital currencies and blockchain technology. Everything remains driven by speculation and forecasted opportunities.
Another risk of investing in the crypto sector is the lack of insurances and official safeguards. Traditional investment tools and financial institutions have a number of safeguards that secure the investors’ money.
For instance, a bank depositor’s savings (maximum of $250,000) are covered by insurance through the Federal Insurance Corporation. Crypto investments are not covered by any insurance. So if the exchange closes, everything you deposited is gone with it.
Crypto investments, particularly coin exchanges, are a leading target of cybercriminals. Hacking, theft, and scams are three common ways your crypto investments can be compromised. Furthermore, not all crypto exchanges are equipped with the same level of security infrastructure which increases the vulnerability of digital coins to cyber-attacks. This makes it crucial to choose the right exchange and practice safety precautions.
Crypto exchanges also don’t have the same guarantees that banks, credit cards or brokerage offers. For example, in case your credit card gets hacked, the credit card company can quickly revert back your money. In crypto exchanges, this is not a certainty and depends at the whim of the provider.
Liquidity and market manipulation
Liquidity risk refers to the difficulty or inability to liquidate or sell an asset quickly at a reasonable price. Cryptocurrencies have this inherent risk which has frequently led to the sector’s high volatility.
Low liquidity also increases the risk of price manipulation by large market players. The lack of regulations makes trading manipulation highly probable. For example, a major player might place high volumes of orders on a particular coin to cause an artificial demand and later on sell them off, leaving investors hanging.
However, as the crypto market goes mainstream and becomes acceptable, cryptocurrencies could become more liquid. The growing number of reliable crypto exchanges will make trading more accessible to more investors.
These are just some of the risks that digital coin investors need to consider. Other risks that should also be given attention to include an increasing number of cryptocurrency scams, chances of human errors, and hype risks.
Spending some time learning and understanding the cryptocurrency investment risks can help you succeed as a crypto investor.