What are the risks of trading cryptocurrencies? (Zycrypto)
Investing in crypto can be risky – especially if an investor’s expectations are removed from reality.
In addition to risk factors like regulations, the cryptocurrency development space is extremely competitive. Bitcoin has been able to leverage its first-mover advantage to stay on top, but this market dynamic isn’t necessarily going to last forever.
For all the risks of crypto, anyone who has been patient with the space has been rewarded with incredible returns. There are also wild price swings in the crypto markets, which make it a prime space for active traders.
Let’s have a look at some of the most prominent risk factors in the crypto market, and why they could affect token prices over time.
Cryptos are a New Technology
It’s easy to be blinded by the massive price rises in the crypto markets – and forget that decentralized blockchain networks have only been around for a little over a decade.
Like any new technology, a big round of creative destruction could hit the crypto markets at any time, especially if Proof-of-Stake systems make a big impact on how decentralized blockchain networks operate.
While risks to which token will remain on top do exist, as more investors and companies adopt the technology, the total failure of cryptos becomes less likely. This risk is also assuaged by major governments and central banks, who are creating and spending fiat currency at historic highs.
The Crypto Markets Move Fast
Trading cryptos can be nerve rattling.
In fact, trading the crypto markets without some sort of trading assistant might not be a great idea. The crypto markets are open 24/7, so if you are day trading, it makes watching the charts pretty tough if you are a human that needs to eat and sleep.
While missed opportunities are one thing, the wild price swings in token prices can affect traders at an emotional level.
There are many ways to use automated trading systems in the crypto markets. Some are done with trading bots and allow the trader to use black-box trading systems that require zero human input, while others like Trality Code Editor allow a trader to use basic logic statements to create trading systems.
Whenever leverage is used in trading, the risk of catastrophic losses is very real. With some tokens moving 50% or more in a day, effective risk management and lightning-fast order execution can help a trader get out of a losing position as quickly as possible.
More Regulations are Coming
There is zero doubt that the body of global laws that will regulate crypto ownership and use will grow over the coming decade.
The recent SEC action against Ripple’s parent company, and a few members of senior management, represents a very real risk to any platform that has a company backing it, and also the cryptocurrency industry as a whole.
By deciding to classify XRP as a security under US law (retroactively, some argue), the SEC has made any official sales of XRP a criminal act – which it now plans to prosecute.
The effect on the price of XRP when the legal action was announced was substantial, but it is likely that the SEC is looking to create legal precedence for the entire crypto markets, which makes the current action against Ripple Labs unlikely to be the last.
Decentralization Makes Enforcement Harder
Unlike XRP, tokens like ETH and BTC don’t really have a company that can be pursued with legal action.
This makes it more difficult for governments to go after the tokens themselves, however, it forces legal action to be directed at crypto service companies, like cryptocurrency exchanges.
It is nearly impossible for the global crypto exchange markets to be shut down, as there are many nations that are more than happy to give major exchanges a home, and access to a robust financial system.
In addition, cryptos are now being mined by energy-rich nations like Russia and Iran (via state-centric companies), who also need access to foreign exchange assets, and aren’t on great terms with the nations that control the Western banking system.
An Increasingly Nuanced Market
The total loss of crypto’s value as an asset class is becoming increasingly unlikely. That said, with the advent of Central Bank Digital Currencies (CBDCs), as well as more blockchain platforms that are superior to Bitcoin at a technical level, there are serious risks to consider in the crypto markets.
On a shorter term perspective, trading crypto has never been easy, and today’s market is no different. In addition to heavy volatility, traders have to grapple with news flow that is increasingly global, and involves many more actors than it did even a few years ago.
Risk and Reward in Cryptocurrency
The good news is that with these risks comes opportunity, as many people still don’t understand the crypto markets, or are afraid to deploy investment capital into tokens.
One factor that is becoming increasingly important in the cryptocurrency market is major investors, like Elon Musk, who is likely acquiring Bitcoin as a long-term investment. This is more or less the case with many institutional investors, which does a lot to de-risk the Bitcoin market.
It is important to remember that major tokens are sitting at or new all-time highs in early 2021, which means that almost anyone who ever bought a token like Bitcoin or Ethereum is sitting on profits, as long as they were able to hold on to the position.