Cryptocurrency trading has become mainstream, and, as a result, there is an increased risk of cryptocurrency trading. It’s important to be aware of the risks involved in cryptocurrency trading so you can make informed decisions about whether the market is right for you. The risk of losing money in a trading account is high, as many traders have experienced. Even if you are able to make money by trading cryptocurrency, there is still a chance that you could lose it all.
Some cryptocurrencies are worth investing in, and a few are not. With a solid understanding of what cryptocurrency is, how it can be stored, and the process of trading, you will be able to make an informed decision about whether cryptocurrency trading is right for you or not. In any case, it is vital to keep your crypto-assets in a secure wallet or accounts that are impenetrable by hacking operations.
Countless people have said that cryptocurrency is the future. And while that may be true, there will always be a risk to any investment. Just be sure to do your research and act accordingly.
Here are some risks of cryptocurrency trading:
Volatile markets invite the risk of cryptocurrency trading.
The volatile nature of crypto markets is a major reason why investors must be careful when choosing a trading platform for their investments.
The volatility of cryptocurrency is primarily caused by speculative trading, which inevitably leads to price swings and extreme fluctuations. However, there are also other factors that can lead to volatility, such as technical analysis and fundamental analysis. The latter refers to predicting the future movement of a particular asset based on past events or trends.
The main reason for the volatility is the large number of factors affecting cryptocurrency prices. One of them is news about crypto exchanges getting hacked or losing customers’ funds due to security issues.
Another factor is new regulations being introduced by governments around the world, which may increase their control over cryptocurrencies or block their use entirely.
The biggest factor is that cryptocurrencies are still very new and have not yet been tested as traditional assets have been over time. As a result, investors have not yet developed a sense of comfort with this new asset class and its associated risks. This lack of familiarity also leads to overreaction when volatility does occur, especially when it comes to large moves, as we saw recently with Bitcoin dropping 25% after a big rally earlier this year (which then recovered).
The problem of cashing out.
There are many ways to trade cryptocurrencies without having to deal with the complexities of the market. Cryptocurrency trading takes place on exchanges where you can buy digital currencies using your credit card, bank account, or PayPal account.
It can also be done using various techniques, like peer-to-peer lending or offline transactions (such as cash deposits).
But problems emerge when the exchange does not have direct cash-out features. Traders must transfer their crypto to other exchanges that have cash-out features or use the P2P method, which is risky for large amounts.
Cyber-risk of cryptocurrency trading.
The anonymity of cryptocurrency transactions makes it easy for criminals to steal money from unwitting users. The fact that there is no regulation on cryptocurrency also makes it easy for cybercriminals to use it as a tool for illicit activities such as money laundering and tax evasion.
In addition, there are several hacks where hackers have stolen millions of dollars in cryptocurrencies from exchanges, leading to losses for investors who were unaware of these hacks until it was too late. Criminals can also use cryptocurrency in ransomware attacks that lock down computer systems and demand ransom payments in bitcoin or another cryptocurrency.
Each transaction is recorded on the blockchain, which is a public ledger where all transactions made with cryptocurrencies are recorded publicly. Consequently, hackers can easily access this information in order to track down cryptocurrency addresses and extract private keys using brute-force methodologies.
Crypto market manipulation.
Most people have heard of market manipulation, but very few know how to fight it. Market manipulation is a serious problem in the crypto market. Market manipulation can cause investors to panic sell their holdings when they see sudden drops in value, which could lead to rapid losses for them.
Many investors have lost millions of dollars due to malicious actors manipulating market prices on exchanges and other digital asset trading platforms. This type of activity is often referred to as a “pump and dump” scheme because it involves selling an asset at a high price, then buying more at a lower price, before selling again at a higher price.
Slow transaction network.
The speed of crypto transactions like bitcoin depends on the fees that you pay to the miners. The higher the fee, the faster your transaction will be confirmed. However, the transaction confirmation time can be delayed if you do not have enough bitcoins in your wallet or if there is congestion in the network.
This delayed time lag may pose a problem for many users who are trying to send their cryptocurrency from one wallet to another, or from exchange to exchange. This delay can also cause problems for traders who want to buy or sell their crypto at specific times of the day or on specific days of the week.
No Regulation.
There are also concerns about who regulates digital currencies. The lack of regulation in the cryptocurrency industry means that some people are more vulnerable to losing their hard-earned money than in other trading markets. It’s important to realize that trading is risky and you could lose your money, so you should only invest what you can afford to lose.
Some countries, like Singapore, have taken steps toward regulating cryptocurrencies as legal tender. However, others, like China, have banned them completely.
Can invite heavy tax.
Cryptocurrency is a virtual currency that can be exchanged for other currencies, but it is not legal tender by any government or institution. The tax treatment of cryptocurrencies can be complex, especially for those who trade in them. In general, cryptocurrencies are not taxed as currency, and profits or losses from trading in them are not subject to capital gains or other taxes.
But some countries have issued guidance on the taxation of cryptocurrencies that may affect your tax return. For example, India has announced that it will treat cryptocurrency as gambling and impose taxes on profits earned from trading cryptocurrency.
Risk of crypto fraud.
Cryptocurrencies are not regulated by any government or central bank, so investors cannot obtain protection against losses due to fraud or theft. There is no guarantee that you will get back the amount of money invested.
As crypto scams and fraud become more common, it will continue to be crucial for whistleblowers to help the government fight back against criminals who are trying to take advantage of this new technology. It’s important that you know how to protect yourself from being scammed or defrauded.
The government has been cracking down on cryptocurrency fraud, but there are still many ways people can get away with scamming others.
This guide will teach you what you need to know about cryptocurrency fraud so that you can make wise choices when using cryptocurrencies.
Exchange Risk.
Exchange platforms invite many risks, especially centralized ones. If an exchange has weak security, then no one can save your funds from being stolen, just like the Bitmart exchange.
Another risk of exchange is team management. As we know, exchanges follow multi-signature security, so in case any team member is found doing suspicious fraud, then all systems will be halted, which may lead to stopping traders from withdrawing their crypto, just like what happened to the HotBit exchange.
The third risk is server maintenance. It is temporary and happens frequently. During maintenance (for all servers or particular coins), exchanges stop almost every activity for 5 to 8 hours, and that is a huge time gap in the volatile market. The last one is delisting. There can be many reasons to delist a coin, ex-LUNA.
Pump and dump is the worst risk of cryptocurrency trading.
The cryptocurrency market is more susceptible to pump-and-dump scams than the stock market because of its lack of regulation. Stock exchange regulators have taken steps over the years to prevent pump-and-dumps from happening in traditional markets, but no such safeguards exist in crypto markets.
The scheme’s creators intend to defraud innocent investors by encouraging them to purchase an asset based on misinformation. When those investors buy in, the pumper sells, effectively lowering the price.
As a result, the scammer makes a lot of money while everyone else loses. This type of fraud has become more common with cryptocurrencies, where pump-and-dump scams are often arranged through groups on social media platforms like Telegram or Discord.
On-chain confusion.
This is a minor mistake that can cause permanent loss. This mistake is generally made by newbies while transferring funds. There was a time when only a few blockchain networks were available, but day by day the number of networks increased, which caused confusion among users.
It happened because every crypto had different features and goals. Currently, the most coins you can find are on ETH and BSC chains, but to capture the market and investors’ attention, they are also available on Tron, Polygon, Solana, Avalance, and many more. For example, Tether (USDT) is available on 50+ chains, while Ethereum is on 10.
So you must make sure the sending and receiving addresses are on the same network. Here is the BTC address from two different networks. bc1qxy2kgdygjrsqtzq2n0yrf2493p83kkfjhx0wlh, 0xa025f1770e0aad9a4b501cb7d4c7db8a5e75eb70
Forks or discontinuation of coins.
Because cryptocurrencies have no central authority, there is no guarantee that cryptocurrencies will continue to exist in their current form. If a cryptocurrency forks, for example, and its value drops below the value of the original cryptocurrency, it may suspend trading in those tokens until they recover.
We recently witnessed forks that didn’t go as planned, such as BitTorrent, Luna, Safemoon, and Bitcoin Cash ABC. So calculate your risk before investing in these types of cryptocurrencies. Recently, we are witnessing ETH moving from PoW to PoS.
No trader’s rights.
Just imagine you wake up one day and find you can not withdraw your cryptocurrency. It seems like it is a problem with the centralized wallet. Then you are wrong.
A so-called decentralized wallet is also giving headaches to its traders. Trader right basically means giving full control to traders over their funds, and that is what was the goal of Satoshi Nakamoto when he created Bitcoin.
This term became a buzzword when the so-called decentralized wallet MetaMask halted funds for American users, but it became worse when LUNA and Celsius stopped the withdrawals to prevent a further crash.
This type of activity raises the question of whether traders right around the world pushed authorities like the EBA and RBI to release warnings on it.
Low market cap is another risk of cryptocurrency trading.
Market capitalization (market cap) means the total value of a coin (in fiat currency). It is calculated by multiplying the circulation supply by the price of a single coin. The market cap shows the health of the coin.
The larger the market cap, the more stable it will be. Meanwhile, low-market-cap coins are very cheap, and they can be wiped out just by pulling a small amount of money from the market. For example, low liquidity can also put you at risk, so you should wisely choose a highly liquidated exchange platform to trade this type of coin. For example, $1 million worth of Bitcoin may take a few seconds to sell while Fantom Coin can take a few minutes to sell on the same exchange.
You must also note that every exchange has a different trading value for the same coin. For example, Fantom coins may take less time to buy and sell at Binance than Kucoin.
So what is your thought?
There are many reasons why you might want to invest in cryptocurrency, and there are some serious risks involved. The first thing you should know about investing in cryptocurrencies is that it is not for everyone.
Whether you’re only looking to dabble in cryptocurrency trading or you’re a full-blown, 24/7 enthusiast, it’s important to be informed of the potential risk involved with entering the cryptocurrency marketplace.
While one bad trade won’t take down your entire portfolio, the possibility of losing money is very real. When trading online with unregulated brokers and exchanges, caution must be exercised at all times, and traders need to protect themselves properly using multiple security measures.
In the end, protecting yourself from risk should be your main concern when trading cryptocurrencies, and it may just save you from harm in the long run.
