Today I’m sharing some crypto trading risks to be aware of before you begin trading. Once perceived as a niche market tech-savvy people engage with, today, cryptocurrencies’ influence reaches large players in the financial landscape, attracting corporations, banks, and tech companies.
Large institutions began investing in Bitcoin in 2020, setting the pathway for smaller investors and firms. MicroStrategy and Square were among the first large-scale crypto investors to recognise all the potential of digital assets, particularly Bitcoin.
While corporations set specialised departments working on investments, evaluating risks, implementing trading strategies, consult with advisors and risk managers, individual traders do not have access to that wide knowledge base. Crypto solutions for individual traders help increase the chance of success in crypto trading, making it safe and efficient.
This article explains the core crypto trading risks, helping beginner investors avoid common mistakes when starting with the crypto market.
Common Risks in Crypto Trading
Here are the most common risks that every trader faces when dealing with the digital asset market:
Volatility in Cryptocurrency Markets
It’s true, that crypto assets are based on decentralised networks and there’s no one to control or set prices for them. Crypto rates depend on the market trend, (the mood prevailing on the market — bull trend, bear trend, or stagnation).
It can also depend on many other factors, such as technical characteristics of this or that coin, reputation of the token issuer, backing by reputable institutions, media buzz, etc. Crypto rates may also drop suddenly or skyrocket “to the moon” when large investors (called “whales”) sell or buy a large amount of assets, shaking the market and causing volatility and turbulence.
Liquidity Challenges in Crypto Trading
Liquidity stands for how easy it is to buy crypto assets or sell them. For example, with high liquidity for Bitcoin, it is easy to buy or sell it in almost any amount, for there are always those willing to buy or sell this coin.
When it comes to less popular or new tokens, it may happen that a trader cannot buy the needed asset because there are no sellers for the proposed buying size. In this case, the asset’s price will grow. On the other hand, if a trader strives to sell a large amount of assets, there must be enough liquidity to fulfil a trader’s position; otherwise, the asset’s price will go down.
Cryptocurrency Scams and Frauds.
One of the biggest crypto trading risks is fraud and scams. The popularity and success of large crypto projects spurred the emergence of new crypto startups and token projects. However, not all of them deserve trust. Scam projects attract investors, making false promises about incredible profits, raising funds, then closing the project and “riding off into the sunset”, leaving their investors with nothing.
Examples include the BitConnect Ponzi scheme, the Thodex scam, and many others. In addition, crypto exchanges are also subject to poor management that may steal users’ funds. An example of the FTX exchange. When the news about the exchange’s mismanagement of client funds overwhelmed the news outlets, investors started to massively withdraw funds from it. As a result, FTX declared bankrupt, leaving millions of clients with no chance to get their funds back.
Unregulated Crypto Markets
Since the cryptocurrency market is still new, there’s no unified regulation for this sector. Different countries and governments come up with regulatory rules to keep this sector under control, however, those rules gradually change and nobody knows how the market will be regulated tomorrow.
This lack of strong regulation and the disparity of regulations in different states (like a full ban on crypto transactions and mining operations in China and the adoption of Bitcoin in El Salvador on the governmental level) create opportunities for fraudsters to make money illegally. Thus, as long as regulations are not robust, there will always be a high risk of being trapped in a fraud scheme.
My advice is to only invest what you can afford to lose – As with all investments, it’s a gamble and you may not come out ahead. Be mindful of the risks in crypto trading and don’t become complacent if you see a profit.
Crypto Trading Risk Management
Looking at all the past fraud cases in the crypto sector and all the risks a trader faces when operating in this market, there should be robust risk management undertaken. To handle the market volatility, it is advisable to implement stop-loss strategies. For example, setting a stop loss percentage, such as 5%, let’s say, below the entry price. It helps reduce the risk of losing all funds or limit the loss to a specific percentage by automatically selling them if the token price drops to the preset level.
Digital asset security is essential; to make sure your assets are in a safe place, investors should hold the most part of their holdings on cold wallets, while trading the remaining assets on reliable crypto exchanges. Using platforms with robust security measures, proved by certifications is crucial, but remember, even the most strongly protected exchanges are hacked from time to time.
As for altcoin liquidity risks, it is possible to overcome them by breaking large trades into many small-sized transactions. Instead of placing one large trade, a trader will divide it into several small and place them separately with a short time break. This will give the market time to process the needed amount of trade volume.
Final Thoughts on Crypto Trading Risks
By practicing the basic security and risk management measures traders may succeed in the volatile, still not clearly regulated, yet profitable cryptocurrency sector. Finally, let me know in the comments if you can think of any other crypto trading risks that people considering trading should be aware of, of if you have any crypto trading risk management tools you’d recommend.
