Crypto Investing
5 Dec 2021

7 Different Types of Cryptocurrency Risks in 2021

Ananda Banerjee

Cryptocurrency is gaining popularity among investors for a variety of reasons, including its unique structure and the possibility for substantial returns on investment. While most people are familiar with popular currencies, many potential investors are unaware of the vast range of assets available or how they function. Before investing, you should be aware of the volatile nature of various forms of cryptocurrencies and possible security, legal, accounting, and tax concerns. We’ll walk you through the potential risks in crypto investing.

Key Takeaways

  • Cryptocurrency, like any other investment asset, comes with its own risks. It is very important to perform individual research before buying cryptocurrencies. 
  • High volatility is one of the major cryptocurrency risks and also the reason why crypto gives good returns. 
  • At the moment, vague regulatory measures are a big concern in certain nations.
  • Cryptocurrency risks for banks include its decentralized nature, AML/KYC concerns, and price volatility.
  • Understanding risks and planning for them is key to a reasonable investment strategy. 
  • Doing research can help mitigate the risks involved.
  • Avoiding excessive leverage can help an investor to be on a safer side.
  • Having a proper Entry and Exit strategy can help reduce the risks
  • Diversifying portfolios while investing in cryptocurrencies is a smart approach.

Is Crypto Safe To Invest?

The seven types of risks that evolved in crypto trading are

  • High volatility
  • Cryptocurrency Trading Regulations
  • Market Risks
  • Operational risks
  • Cryptocurrency risk with taxation
  • Human error
  • Cyber risks

High Volatility

Volatility is the unexpected shifts in market mood that can cause significant and rapid price movements. This is also visible in other markets. With more knowledgeable traders and investors participating, this volatility will become more steady over time. But if you still find cryptocurrency unpredictable, there are a few clever methods to deal with it like a boss. Let’s go over it in more detail later in the article.

Cryptocurrency Trading Regulations

Regarding the legal status of digital currencies, there are substantial discrepancies among the various regulatory agencies. Also, regulators fear bitcoin and other cryptocurrencies might be utilized by criminals and terrorist groups. However, with growing awareness and use-case of the underlying technologies, regulators are leaning towards a more accommodative regulatory standpoint. In the long term, good regulations will help enhance investor protection and reduce risks. 

Market Risks

Crypto assets, just as other commodities, are exposed to risks arising from movement in the markets. There are several other risks associated with crypto trading that are categorized as systematic risk and unsystematic risk. The systematic risk is inherent in the crypto markets and hence common to all cryptocurrencies, and unsystematic risk, which is particular to a single crypto asset could involve a change in the company’s fundamentals.

Cryptocurrency Risk with Taxation

There is ambiguity when it comes to the tax status of cryptocurrency investments. Depending on the jurisdiction, bitcoins and other cryptocurrencies may be classified as assets in certain countries and as currency in others. For example, digital currency purchases and transactions might incur sales or value-added taxes (VAT). Individual tax counsel may be required regularly by digital currency investors, depending on where they reside.

Cyber risks

The distance between the keyboard and the chair is as important as the crypto holders’ cyber hygiene and safeguards. However, unlike other cryptocurrencies, bitcoin is often plugged into by newcomers with poor cybersecurity standards and resources. In terms of traceability, transaction logging, and trust, not all cryptocurrencies are equivalent. In this setting, “strange disappearances” and ransomware attacks are both complicated and fast-moving threats. So one needs to understand these threats before moving into crypto. It is important to understand the security measures undertaken by exchanges you invest in and the safeguards they deploy. 

Ways to Mitigate Cryptocurrency Risks

Ways to Manage the Risks Involved in Cryptocurrency Trading

  • Do your research

Before investing in any cryptocurrency, make sure you do your homework and only invest what you can afford to lose. Investing  because you feel left out or without speaking with an investment professional is not recommended. It is important to understand the team behind each crypto and what their vision is, just as understanding the ownership behind each equity in stock markets. 

  • Understand your reward/risk ratio

The reward to risk ratio is the amount of money you stand to gain for every unit of currency you risk. Invest just what you are willing to risk. A ratio of 1:1.5 is considered rational. It means for every one loss you make 1.5 profit.

  • Diversify your portfolio

Investing in many cryptocurrencies might assist in reducing risk. A well-diversified portfolio reduces the risk associated with the portfolio because investment is spread among several coins, the impact of volatility may be mitigated. Some coins are very volatile, while others are not.

  • Determine your entrance and exit strategies: 

Your trades’ entry and exits are critical components. A perfect entry is a cherry on top of a good transaction, but with exits, you must weigh both gains and losses. An effective risk management strategy requires you to plan your exit points as well.

  • Excessive Leverage should be avoided. 

Traders frequently utilize margin since it raises order size and allows them to go long or short. However, if you employ too much leverage, your trades will not have enough time to breathe, and you may lose your principal amount during forced liquidation. Some exchanges provide leverage as high as x100, yet even a 1% move against you may wipe out your account. Three times (x3) leverage is a more rational and standard way to adopt for trading. This will help you to maximize your profits while also providing you with a haven to escape a poor deal. The sole exception to this rule is scalping on shorter time frames during turbulent markets. The longer you hold a transaction, the less leverage you want to employ.

  • Choose trading quality over quantity.

Overtrading in markets is a waste of time and money as it simply stresses the individual. The secret to successful trading is to prioritize quality over quantity. Not every market circumstance will be favorable to your plan. Swing trading is more effective during strong trends, but automated scalping is most profitable when markets are steady. To locate good trades, you must first figure out what trading strategy works best for you and then identify the appropriate market circumstances.

  • Prepare an Exit Strategy

On the charts, identify important support and resistance levels and plan your trades ahead of time. Calculate the risk-to-reward ratio and define your profit objectives. During strong trends, traders may either increase their position or lock in profits by scaling out along the way. You should also create stop losses to protect yourself if the markets go against you. Keep in mind that stops are not always effective when the price changes too quickly, and you may receive a terrible fill due to slippage.

FAQs on Risks in Crypto Trading:

What are the risks with cryptocurrency investing?

Volatility, market risks, human error, and ambiguity in regulations are some common risks with cryptocurrency.

Is cryptocurrency worth the risk?

There’s no disputing that investing in any cryptocurrency carries risk just like any other investment asset giving good returns. Prices may vary wildly, but a diligent and observant investor can gain. 

Is crypto better than stocks?

Comparing stocks and crypto is like comparing apples and oranges. Each has its charm. However, if the goal is to earn sound returns while being open to a more significant risk appetite, crypto makes sense. Most importantly, do your homework before plunging into any choice, regardless of the one you select.

What are cryptocurrency risks for banks?

Cryptocurrency risks for banks include its decentralized nature, AML/KYC concerns, and price volatility.

Final thoughts

The ecology surrounding cryptocurrencies is rapidly developing, as it is with any new and innovative technology. If this is the sector that pleases your investing taste buds, you should be lured by more than just the gains and volatility. Before investing, it is critical to understand how cryptocurrencies function, their purpose, and the ecosystem that surrounds them.

Ready to keep these risks in mind while trading! Download the app right away and start investing while keeping these factors in account.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

writer

Ananda Banerjee

Content Writer

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