When you choose cryptocurrencies as a way of making a passive income, you finally become the sole owner of your investment. Since great power comes with great responsibility, in order to bypass the usually ineffective banking system you have to be aware of a set of small, simple rules.
Cryptocurrencies have quickly consolidated their position on the financial markets, and that is due to their versatility and major earnings potential. A very important part of every trader’s routine is managing and mitigating trading risks.
This article’s aim is to present the most common risks traders confront with, followed by potential solutions to their problems. Some of the risks are easy to spot early on, while others are not that obvious.
Here are the most common risks traders are exposed to:
The first and most important risk traders face on a daily basis is with market volatility. Most of the other risks are usually closely linked to this one or are derived from it. There have been cases when a cryptocurrency fell way below its initial market price in a matter of minutes. Bitcoin is a perfect example of how virtual currencies can reach almost half their value in a very short interval.
A currency’s value is mainly based on its popularity, which in turn in dictated by the number of people seeking to acquire it. It also has to do with how easily it can be transacted and how promising projections about its future evolution are.
In order to avoid major risk, it’s ideal that you start out with a smaller amount of money and gradually increase the sum, once you get a taste of the market and get to know the ropes.
Digital currency prices are in constant motion, so choose your investment carefully and only after you’ve done your research.
Lack of official regulations
A major issue that we need to discuss is the lack of official regulations. Currently, cryptocurrencies are not government or bank regulated in most countries. This is why the degree of volatility is so high, but this is also why a lot of capital can be earned by speculating on it.
Every major risk has a silver lining, and the cryptocurrency world is no exception to this rule. Since the crypto mining technology that supports this whole virtual trading system is new and the phenomena unprecedented, regulations are not very strict or are being created along the way. Due to the major surge in investors, however, measures are being taken to solve this problem.
Threat of hacking, cybercrime and illicit activity
This major risk can be easily avoided if you choose a trading platform that is trustworthy and, most importantly, authorized. Check out their certifications, ask around for opinions and take a test run to see if their way of doing things suits your trading needs.
Since crypto mining rigs are virtual, there is no infallible way of preventing human error, hacking or bugs. The semi-anonymous nature of cryptocurrencies turned them into profitable areas of interest for criminal activity, this consisting mainly of money laundering. If you are not an IT or cybersecurity expert, you could stand to lose capital without knowing why.
If you decide to invest large amounts of capital into cryptocurrencies and are not an expert when it comes to security issues, it’s probably best to seek professionals who can cover that part for you.
Getting locked out of your account
Losing your private keys means zero access to funds. There is no phone number you can call to fix it, no chats to access for key recovery. You are the only one who’s responsible for this loss.
You can easily cross out this type of risk by having a backup system at the time you’re creating your online wallets. These backup methods should be stored in a place that can only be accessed by you or people you completely trust.
Watch out for hard forks
These have to do with volatility, but the process that leads there should be explained separately. Crypto coins can be influenced by interruptions or bifurcations in the matrix, known as “hard forks”. These create a parallel universe that divides the blockchain system into 2 separate versions of 1 initial system. The newly-created blockchain version is totally separate from the old one, with no communication or transaction way between the two.
The new version inherits the transaction timeline from its old version, but the 2 systems work independently from one another. Bitcoin went through this exact process in Aug. 2017, and after this transformation volatility reached unexpected heights. Hard forks represent both an opportunity and a risk. To capitalize on hard forks, traders must first spot the opportunity and the only way to do that is by knowing when and how they occur.
If you use a DeFi platform that integrates with others, which is always the case, the overall risk consists of both platform’s risk degree. You are basically interacting with 2 smart contract categories, so the risk is drawn from both.
Stay away from the hype
Traders have a hard time keeping their emotions in check when it comes to fear of missing out. They either get too greedy and buy too much or panic and cash out when prices fluctuate. Having a strong psyche that is not easily swayed wins you half the trading battle.
Hypes usually signal that a market has reached its distribution phase. Shortly after a down trend will follow, so that is why buying when a hype is at its peak is such a bad idea. What you see in the media is usually reported way after the facts have happened, and by that time it’s already too late to make the right call.
Do your research, know your trends and buy before the hype so that you get to sell at peak prices.
Only choose reputable trading platforms
Even if you’ll have to put more time and effort into finding the trading platform that best suits your needs, it will pay off in the end. Choosing a safe platform is an investment in itself, so don’t shy away from exploring all your options. The last thing you need is an unexpected security breach that puts all your information at risk. You should focus on expanding your portfolio and profits without having to be concerned about how secure your data is.
All in all, risks are inevitable in the trading world. You can’t eliminate them altogether, but you can get used to spotting risky patterns early on and minimizing them as much as you can. Good luck with all your trading endeavors!
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