Want To Be a Crypto Trader? Bring Your Appetite for Risk

What Are the Main Risks to Crypto Trading?

High Level of Volatility

Because cryptocurrencies are a relatively nascent asset class, some cryptocurrencies have low levels of liquidity, which makes them more susceptible to significant price swings. Cryptocurrencies with a low market cap and low liquidity are liable to respond with more volatility in either direction in response to large scale market movements. The price of digital assets can also be susceptible to fluctuations connected to negative and positive sentiment from industry-related news headlines in the blockchain space. The changing prices of cryptocurrencies with low market caps and poor liquidity may trigger price fluctuations in other cryptos as hedges are made. Price volatility is also particularly relevant with respect to crypto margin trading, where gains and losses can be magnified due to leveraged trading positions.

Market Instability

Because the crypto market is continuing to evolve, digital assets have yet to become a common medium of exchange. Bitcoin payments, for example, are still banned in many places and many retailers continue to reject cryptocurrencies because their value can decline overnight. Despite select jurisdictional restrictions, several large online marketplaces, retailers, and service providers accept bitcoin (BTC) as a form of payment. Examples include Whole Foods, Bed Bath & Beyond, and Microsoft.

Developing Regulatory Framework

It’s important for a crypto trader to consider the developing international regulatory landscape surrounding cryptocurrency. Although cryptocurrencies have some degree of meaningful regulation in the United States, jurisdictions stateside and around the world are continually working to define their regulatory posture toward cryptocurrency trading and payments. While countries like Germany, Singapore, and Switzerland have been lauded for their progressive digital asset regulation, the use of cryptocurrency faces significant hurdles in places like China. However, in recent years, countries like India have revisited legislation and lifted restrictions.

Hacker Attacks and Scams

Unless secured according to stringent procedures, your crypto holdings may be vulnerable to theft by hackers. Cybercriminals have reportedly utilized malware, phishing, and other nefarious tactics to break into exchanges and wallets to steal funds. Although bad actors persist, there are many ways for you to secure funds as a crypto trader, either on your own or through trusted third parties. This means either by using a non-custodial hardware wallet or by transacting and storing your crypto with a cryptocurrency exchange — but only one with an impeccable track record in security.

How Do I Minimize Cryptocurrency Trading Risks?

Part of being a relatively new asset class means that many people don’t fully understand all nuances and specifics unique to cryptocurrency. You should take steps to avoid foreseeable risks by building your knowledge and understanding of the asset class before engaging in any kind of cryptocurrency trading.

Have a Cryptocurrency Trading Plan

Before you engage in cryptocurrency trading, you should research the types of assets with which you intend to trade, as well as trusted exchanges and crypto storage options. The risk associated with cryptocurrency trading in a high volatility market is not suitable for all investors with varying means and financial goals. It is paramount that you understand the purpose, functionality, and any associated risks of an asset and the project behind it prior to engaging in the purchase of digital assets. Once you have done your due diligence, you may wish to set goals and limits around personal cryptocurrency trading as an additional safeguard.

Pick a Trusted, Regulated Exchange

Crypto exchanges around the world hold a variety of regulatory operating permits and offer varying levels of trust. Before you deposit your funds with any platform, it’s imperative to research the scope of their operations, products and services, regulatory guidelines, and certifications, along with safety and security. Digital assets on a reputable exchange are usually held in both “hot wallets” that are continuously connected to the web that facilitate near instantaneous trading, as well as in “cold” storage, offline and protected from hackers. Many require two-factor authentication (2FA), which provides an extra layer of safety, requiring a combination of passwords and devices to gain access to an account.

If an exchange platform offers services to institutional investors, it’s a sign that it offers robust security — and a reputable service — for large-scale investors and organizations. For retail investors, the availability of reliable customer service is an important component of trust building. Perhaps most critically, investigate whether your exchange offers anti-theft insurance as an additional protective measure against the unlikely event of an exchange hack. Gemini, Binance, Coinbase, and others offer insurance against hackers, and it is important to read and understand their individual terms of service prior to utilizing the exchange.

Cryptocurrency has matured at an incredible rate as an asset class since bitcoin was first traded in 2009. Although there are risks involved with digital asset markets, the rewards of engaging with this new technological and financial era are abundant and plain to see. By taking basic precautions and becoming familiar with blockchain technology, you’ll be empowered to trade cryptocurrency within your means and according to your own personal risk tolerance in pursuit of your financial goals.