Are you thinking of getting into cryptocurrency trading? The digital currencies in the cryptocurrency ecosystem have presented a lot of financial opportunities for people.
The truth is that the cryptocurrency ecosystem is filled with exciting adventures, but you must trade with caution. Cryptocurrency trading has high speculation, this high speculative risk is because of the massive swings in prices.
It is possible to make very high gains trading cryptocurrencies. In the same way, you can get losses that will keep you devastated. As a cryptocurrency trader, you have to understand the many risks in the cryptocurrency industry.
In this article, I will be showing you the risks associated with cryptocurrency volatility, technology, and uncertainty in regulations.
Cryptocurrency Trading Price Volatility Risk
The prices of cryptocurrency can swing up and down every week. Sometimes, the prices can go up and down in one day. The price of Bitcoin dropped by 30% on the 19th of May 2021 because the Chinese government fought bitcoin trading and mining.
The rise and fall of cryptocurrency prices are because of different factors such as:
- Public sentiments
- Mainstream adoption
- World news
- Impending regulations
- Upgrades of protocols
- Cryptocurrency scams
- Wallet and Exchange hacks
Furthermore, cryptocurrency is relatively a new class of asset in the industry, and the components of these markets are still testing and discovering their prices.
Cryptocurrency Trading Technology Risks
The blockchain technology on which the cryptocurrency runs has a lot of security measures. Some of these security measures are;
- Consensus mechanism
The consensus mechanism is the process through which transactions get validated. However, this consensus mechanism does not guarantee the blockchain’s immunity to threats.
Trading cryptocurrencies securely entails that you back up your cryptocurrency wallet at all times. When you do a backup regularly, you will save yourself from computer failure, mistakes, and stealing of your funds.
You might accidentally delete your wallet, you will get back your wallet if you have your data backed up safely. Backing up your wallet is one way to avoid loss from your end, but you might not be able to control risks like data glitches, software bugs, and other attacks.
Moreover, cryptocurrency investors have expressed major concerns about the progressions and innovations to come in quantum computing. The next generation of technology in quantum computing might bring further disruptions in the blockchain and cryptocurrency industry.
The phase of computational computing can give so much power to hackers and give them the opportunity to hack crypto wallets, rewrite the transaction on the blockchain network, and alter the entire system.
If these happen, it might be the end of cryptocurrencies and their trading. These times will not be anytime soon, although big cryptocurrencies like Ethereum and bitcoin are already working out post cryptographic quantum computations.
Cryptocurrency Trading Low Liquidity Risk
Liquidity refers to how fast and efficient it is to trade your cryptocurrencies for fiats.
Compared to stocks and bonds, cryptocurrencies are less liquid. Newer cryptocurrencies are usually less liquid than prominent ones like Bitcoin and Ethereum.
Therefore, the low liquidity rate will make trading your digital currencies for cash a bit difficult.
Due to this low liquidity, you may get “Slippage.” Slippage is the price difference between when you place a trade and when the trade is executed.
The reason for slippage is the ask/bid spread. The spread is the difference between the price that sellers are willing to sell and buyers are willing to buy.
Less liquidy can cause a change in price while you are waiting for the orders to be filled. When buying power increases, it is Positive Slippage, when it decreases, it is negative slippage.
Slippage is a popular cryptocurrency trading concept. The amount of slippage can be between 0.05% and 0.1%. If the cryptocurrency is too volatile, the slippage can be as high as 1%.
If you want to avoid slippages while trading cryptocurrencies, you have to check for offers like your exchanges’ limit orders, slippage warnings, and slippage estimates.
Cryptocurrency Trading Scams And Fraud Risk
The growing interest of cryptocurrency traders every day is an attraction for scammers and fraudsters. Scammers and fraudsters will find every means to exploit gullible crypto traders.
A good example of a scam and fraud crypto trading risk is QuadrigaCX. The platform is a crypto trading platform that collapsed in 2019, the collapse was because the founder had some fraudulent behaviors and eventually died.
Cryptocurrency traders and investors lost at least CAD$169 million. Another example of fraud and scam cryptocurrency is Squid Game. The team rug pulled the project and made away with over $3 million.
Many cryptocurrency traders and investors bought the coin because they felt the coin was associated with the Netflix Original Series “Squid Game.”
The ruses associated with less popular cryptocurrencies are becoming too often. Crypto investment scams were the highest scams for 2021.
People around the world get deceived by ads and invest in cryptocurrencies. Other methods of cryptocurrency scams and frauds are;
- Tech support scams
- Fake trading platforms
- Pump and dump scams
- Ponzi schemes
To keep yourself from falling into investment scams, you have to be careful about investing in cryptocurrencies. It does not matter if the investment source looks legit, you should make your research and then make your investment.
Furthermore, you will have to be very careful about ICOs (Initial Coin Offerings) and airdrops. These two events are ways these scammers rip unsuspecting crypto traders of their money.
Other Risks Associated With Cryptocurrency Trading
Other cryptocurrency trading risks are;
- Risk of Cryptocurrency hacks
- Uncertainty in regulations and legality risk
- Human error risks
- Income task risk
When it comes to business and trading risk, cryptocurrency trading is not the only place where there is a risk. On your end as a cryptocurrency trader, you have to be very cautious.
Make sure you do not make an investment decision without a thorough investigation. Make sure you understand the cryptocurrency, how it works, and every other detail before you start trading it.
Overall, make sure you get so much knowledge about the market before venturing into cryptocurrency trading.
A lot of people start their cryptocurrency trading journey without understanding the intricacies because of the Fear of Missing Out (FOMO).
Do not be caught by that fear, trade only what you understand. Most importantly, do not trade cryptocurrencies with money you cannot afford to lose. No matter how skillful you are, the market is not always your friend, it is a very volatile place.