Crypto Trading Risk Factors

by Sandip Das from
Crypto Trading Risk Factors

Read this beginners’ guide on crypto trading risk factors to know the primary risk factors related to crypto investments. While entering the crypto market for the first time, most traders think only in terms of potential profits. However, more than 90% of traders end up losing money at the end because they tend to ignore risk factors related to crypto trading.

Cryptocurrencies are much more volatile compared to traditional assets like stocks, bonds, or commodities. It’s common for a crypto's price to go up or down by 20-30% in a single day. Such wide price swings are not generally observed in the cases of traditional assets. Also, crypto is a relatively new asset class involving complex technologies. It’s not at all easy for a layman to understand things like proof of work or crypto staking. This means a lot of investors don’t have sufficient knowledge about what they are entering into.

In this post, we are going to discuss the cryptocurrency trading risk factors that most traders encounter. Also, we are going to highlight a number of key factors related to crypto investing and provide the answers to questions such as what are the risks of trading cryptocurrencies.

1. Why investing in crypto can be risky

Risk and return are two integral parts of investing in any type of asset. The art of profitable investing is all about managing risks and maximizing returns, which we also mention in a special guide about Cryptocurrency Investing for Beginners that you can find on our site. If you think about traditional assets like blue-chip stocks or commodities like gold, they involve a relatively low amount of risk compared to crypto.

As an asset class, crypto involves a number of additional risk factors because of which crypto investing can be quite tricky as well as risky. Let’s first look at these crucial crypto investing facts:

  • Price fluctuations Cryptos have much higher volatility compared to other assets. This means the price of cryptos changes more frequently and that too by a large magnitude.
  • No intrinsic value Unlike stocks or commodities, cryptos have no intrinsic value. This means the value of crypto mainly depends on future expectations or speculation.
  • Complex technology Cryptocurrencies are based on a number of difficult concepts and technologies like cryptography, blockchain, and encryption. It’s very difficult for a common investor to comprehend all these and make informed crypto-investing decisions.
  • Regulatory concerns In most countries, there is hardly any comprehensive framework for regulating cryptos. In fact, currently, crypto regulations are in a state of flush. Regulatory concerns lead to uncertainties and speculations.
  • Too many choices Currently, there are about 9,000 cryptocurrencies of varied types. Also, these large numbers of cryptocurrencies belong to different domains and functions (for instance, stablecoin, utility coin, and memecoins). So, making a choice from this vast ocean can be an overwhelming task for a lay investor.
  • Risks of Crypto Scams While crypto’s promise is to provide the utmost security and privacy, there is no dearth of scams of all shapes and sizes in the crypto world. Starting from fake tokens to dubious crypto platforms, fly-by-night crypto projects, crypto investment scams, and fake crypto wallets, scammers have many ways to dupe unsuspecting investors. A simple advice - if it sounds too good to be true, it probably is!
risks related to cryptocurrency trade Risk analysis is necessary before any cryptocurrency investment!

2. The biggest risk factors of crypto investments

Crypto is one of the riskiest investment options because of cryptocurrency investment risk factors. Let’s look at the leading risk factors involved in crypto investing:

2.1 High volatility

Volatility indicates the extent and frequency of changes in an asset’s price. When volatility is high, we can expect wide and more frequent price swings. Crypto has a much higher level of volatility compared to traditional assets like stocks or bonds. In fact, it’s pretty common to observe a crypto’s price changing by 10-20% in a matter of hours. To know more about crypto market volatility, read our detailed crypto market volatility guide.

Cryptos can give you high returns in the short run if the market moves are favorable for you. However, when there is a sharp and adverse price movement you can end up losing heavily. High volatility is one of the primary cryptocurrency investment risk factors.

2.2 Difficulties in calculating the fundamental value

You can calculate the fundamental or intrinsic value of a stock by considering a number of factors like revenue, market share, dividend payouts, or cash flows. Also, stocks represent ownership in real businesses. But how are you going to measure the intrinsic value of cryptocurrencies?

Most crypto platforms have no solid use cases or business models. Therefore, their valuation is mostly speculative in nature. Since it’s difficult to arrive at the intrinsic value of a crypto asset, you never know how much is too much! So, no one really knows when a crypto coin is overpriced or underpriced. The difficulty in calculating fundamental value is one of the biggest risks of cryptocurrencies.

risky sides of trading with crypto It may be beneficial to take risks when trading crypto but you need to be careful!

2.3 Regulatory uncertainties

Crypto regulation is a big grey area in most countries. Even though buying and selling crypto coins is pretty much legal in many countries, there is no comprehensive regulatory framework for crypto. Also, a complete absence of crypto-related regulatory bodies in most countries makes crypto investment quite risky. What if a country decides to restrict the use of cryptos? For instance, China put a blanket ban on crypto transactions in 2021.

Moreover, since there is no solid regular framework for cryptos in most countries, there are no adequate mechanisms for protecting investors’ interests. Regulatory uncertainties increase the risks of trading cryptocurrencies. However, one positive development is that many jurisdictions like the US, UK, and EU are working on some full-fledged crypto laws to increase transparency and protect the interests of all stakeholders.

2.4 Security risks

Crypto is supposed to be extremely safe and secure. However, despite the unparalleled security features of blockchains, there are many potential security loopholes in the crypto economy. In the past, hackers have been able to steal investors’ crypto assets from crypto exchanges. Hackers can also access online crypto wallets to steal your crypto assets.

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In addition to security breaches, there is a substantial fraud risk associated with cryptos. Illegimitae crypto exchanges or dubious crypto projects can defraud investors and siphon off their funds. Therefore, security and fraud risks are two of the primary risks that cryptocurrency investors encounter.

2.5 Complex and evolving technologies

Let’s get it straight- crypto is very difficult to understand. In order to properly comprehend how crypto works, one needs to learn a range of difficult concepts coming from mathematics and computer science. Concepts like proof of work, crypto mining, and hash functions are not easily accessible to lay investors. This means one thing for sure - most crypto investors have a only vague idea about what they are getting into.

What makes the crypto space even more complex is its evolving nature. Cryptocurrency is a new technology that only came into existence in 2008 even though the underlying concepts existed for several decades. Crypto is also a rapidly evolving domain. We can see major innovations disrupting the crypto market every few months.

New protocols, technologies, consensus mechanisms (read our detailed guide on consensus mechanisms in cryptocurrencies), and scaling techniques hit the market in short intervals. What this means for a simple investor is an overwhelming complexity in tracking all these developments and making informed investing decisions. The evolving nature of crypto leads to additional risks in crypto investing.

2.6 No central authority

Decentralization is one of the defining features of the blockchain. A cryptocurrency is a decentralized digital currency for seamless peer-to-peer financial transactions. This means there is no central authority like banks, regulators, or the government controlling the functioning of a crypto platform or any crypto asset. While decentralization has many benefits like added privacy and transparency, it comes with certain disadvantages to crypto investors.

When there is no controlling authority, investors are on their own to protect their interests. If your money gets stolen from your bank account, you can still approach your bank and lodge a complaint. But when your crypto gets stolen from your crypto wallet, you have no one to blame.

If despite of all the points above, you decide to enter crypto world, our article explaining how Bitcoin mining works may be helpful.

3. Benefits of Cryptocurrencies

While crypto has a number of risk factors like high volatility and a lack of intrinsic value, crypto’s benefits outnumber the risk factors. Let’s look at the main benefits of cryptocurrencies:

3.1 Decentralization

The decentralized nature of cryptocurrencies empowers consumers, users, and developers in a number of ways. Because of crypto’s decentralization, you can send or receive funds without having to rely on any bank or other payment processor. Crypto allows you to have complete control over your finances. Also, no government agency can track users’ financial transactions on a blockchain platform.

3.2 Privacy & anonymity

In a blockchain platform, privacy comes hand in hand with decentralization. On blockchains, users are not represented by their real name or identity like a social security number. Rather, users are represented by an address on the blockchain (which is a long string of alphanumeric characters). This means your financial transactions remain private and anonymous. Moroever, no one can alter information on a blockchain once it has been successfully recorded in blocks.

To increase your chances of getting profits from crypto trading, it is worth to know the best crypto tools, which can make the whole process easier and more profitable. We enumerate them in our article.

3.3 Security

Blockchains record data immutably, which means no one can fabricate or alter information once recorded in a blockchain. Also, it’s nearly impossible to hack and take control of a blockchain by the bad guys. Privacy, security, and decentralization are at the core of blockchain technology.

3.4 Fast and global transactions

Crypto transactions are fast and they are not bound by national boundaries. Since blockchain platforms are maintained and operated by the participants, and users, irrespective of their geographical location, cryptos have a seamless global presence. Also, using crypto you can make superfast financial transactions as cryptos operate without a controlling body.

3.5 No intermediaries

One of the central features of crypto is that it gets rid of the middleman. So, if Bob wants to send Bitcoins (BTC) to Ross, they don’t need to make this payment through a bank or other payment processing company. Bob can directly send BTC to Ross without involving any authority in between.

As you can see there are planty of arguments for trading with crypto. If you want to get even higher profits, why not ljoining online casino and receive bonuses in Bitcoins, for example? You can learn how to gamble with cryptocurreny from our guide.

4. Crypto Trading Risk Factors - FAQs

4.1 ❓ Is cryptocurrency a high-risk industry?

Cryptocurrency is a high-risk high-return industry. Therefore, even though it has a very high return potential in the short-run, you need to effectively manage risks.

4.2 ❓ What are the factors affecting cryptocurrency trading?

Cryptocurrency trading depends on a number of factors like volatility, the price trend in the market, the bull and bear cycle, and technical factors (for instance, price trend, support and resistance, and moving averages).

4.3 ❓ Is it possible to avoid risk when trading crypto?

Crypto trading significant amount of risks and it’s not feasible to avoid risks entirely while trading crypto. However, you can manage crypto trading risks to maximize your returns. Also, you need to conduct an effective crypto trading risk analysis before investing in crypto.

4.4 ❓ Which risk factors to take into consideration when trading crypto?

While trading crypto, you must consider factors like volatility, price trends, overall crypto market dynamics demand and supply, and the crypto market cycle. Moreover, you must keep an eye on the main risks while trading cryptocurrencies. This post on crypto trading risk factors mentions the key risks to be managed while investing in cryptocurrencies.

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Comments (2)
Better than you
Better than you 3 months ago
inexperienced investors tend to ignore all these things...
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