Cryptocurrencies have quickly become popular in the past decade, and almost everyone is talking about or investing in them. However, Cryptocurrency investments are different from any other investment in the financial system. They go against traditional investment trends and are prone to huge fluctuations.
There are more than 10,000 cryptocurrencies and a large number of cryptocurrency exchanges, and they are increasing every day. Especially for first-time investors. This article will discuss the biggest risks that novice and experienced investors should be aware of in this volatile market.
1. Volatility
Volatility is one of the most basic indicators of an asset's financial health, and cryptocurrency is one of the most volatile investment options right now.
At the beginning of 2021, Dogecoin rose by more than 20,000%, but by May 2021, its value had shrunk by more than a third. Wild speculation about the future of Cryptocurrency has caused prices to skyrocket up and down. Speculative traders have fueled the Cryptocurrency market, and some investors are quick to buy and sell their holdings at the first sign of a price decline. A single negative popular tweet or coverage about Cryptocurrency can cause its price to plummet quickly.
2. Cyber theft and hacking
Cryptocurrency is kept in digital wallets and traded through digital currency exchanges. Cryptocurrency is particularly attractive to cybercriminals because of its decentralization and anonymity. In order to access Cryptocurrency wallets and trading platforms, criminals use various Phishing attacks.
3. Decentralization
The lack of regulation by a central authority is arguably one of the most attractive features of Cryptocurrency. However, it also comes with drawbacks. For example, in most online financial transactions, electronic money transfers are usually supported and mediated by Financial Institutions. Therefore, if there is a problem with the transaction, it is easy for users to contact them and solve the problem.
For Cryptocurrency trading, this is impossible. Its decentralized nature makes it difficult to find the right entity to submit a trading dispute. Therefore, it is recommended that most Cryptocurrency investors trade through reputable cryptocurrency exchanges.
4. Risks associated with peer-to-peer trading
A peer-to-peer (P2P) platform is a cryptocurrency marketplace that directly links buyers and sellers. On a P2P trading platform, any cryptocurrency transaction is paid directly between two parties. However, wrong or negligent human factors can lead to the loss of your assets. In addition, there is always the risk of scams and fraudulent schemes, such as buyers refusing to pay for received cryptocurrency or sellers refusing to send tokens, etc.
Finding a service platform that offers trading of digital assets is the best way to avoid these scams. During trading using this service, Cryptocurrency is held by the platform. After the buyer completes the payment process and the seller confirms receipt, the asset will be released to the buyer immediately. This guarantees that both parties get what they want. If a disagreement arises, it will be resolved by the platform representative.
5. Lost or destroyed private key
Cryptocurrency is built on top of an encryption system that uses key pairs to verify transactions . One is a publicly available public key, and the other is a confidential private key, which is used for authentication. When you open an encrypted wallet and grant users ownership of the funds in that wallet, a private key is automatically generated.
Losing a private wallet key means losing control or access to any Cryptocurrency in that wallet. In fact, about 20% of lost bitcoins are due to a lost or corrupted private key. Therefore, regularly backing up private keys is very important, preferably on a secure and isolated computer. Also, never store your private key online, especially if it is not in encrypted format.
6. Unregulated trading platforms/exchanges
The popularity of Cryptocurrency has led to an increase in the number of Cryptocurrency exchanges and trading platforms. Cryptocurrency exchanges provide the same level of services to Financial Marekt as traditional Financial Institutions. However, the lack of regulation has contributed to the growth of fraudulent trading and market manipulation in Cryptocurrency trading. Some exchanges have excessive transaction fees and no policies to prevent manipulation or suspicious transactions, while exchanges that are completely unregulated may adopt predatory practices.
The best way is to find trading platforms and exchanges with good security. Read the fine print of their terms of service and avoid using platforms with unrealistic claims.
7. Regional regulation
Regulation is one of the most serious threats to the continued growth of Cryptocurrency. Governments around the world have instituted regulations to restrict the use of Cryptocurrency in their respective countries. Many governments see Cryptocurrency as a way to circumvent financial regulations and facilitate money laundering. Currently, most governments are studying how to integrate Cryptocurrency with their existing fiat currencies. Other countries, such as El Salvador , have fully embraced Cryptocurrency, with some even launching or considering launching national Cryptocurrencies.
For many new investors joining the market, learning how to get the most out of your crypto assets is critical to reducing risk and maximizing any potential returns. What follows are four risk management strategies that can make a Cryptocurrency portfolio profitable:
1. Diversification
One of the easiest ways to reduce risk and in some cases help improve returns is to invest in a range of different crypto assets. Known as Diversified Asset Allocation, it is possible to diversify your investments to average losses when the market is down. A common strategy is to choose different types of Cryptocurrency to ensure that you benefit if one of the many industries experiences a surge. Conversely, if one or more industries experience a decline, it also results in Risk Diversification.
2. Copy trading
As the name suggests, copy trading is a type of investment trading where you can automatically copy the trades of professional investors. X Exchange Copy Trading provides features that allow you to copy with one click .
The setup is simple:
Choose the traders to follow based on factors such as previous performance, number of followers and overall risk score (how risky an investment asset is). Link your account to their activity.
1. When they choose to buy or sell crypto assets, your portfolio will automatically do the same.
2. This is a completely intelligent way of trading Cryptocurrency without the need for you to research and track the market yourself.
Once you have identified a trader (or multiple traders), you can determine how many portfolios to allocate to each trader. Helps to spread your funds and build a balanced portfolio. After you have completed your investment, trading will begin automatically. Of course, if the trader performs well, you can change traders or add more funds at any time. You cannot predict a trader's earnings or the future movement of crypto assets, so it is crucial to set a loss limit. If you lose a predetermined amount or the value of the asset decreases, it will automatically stop your copy trading.
3. Do Your Own Research (DYOR)
Doing your own research is an indispensable investment risk reduction strategy for any investor. In the Internet age, doing your own research is easier than ever. You must do your own due diligence before investing in tokens, projects or other assets. The key to due diligence is to review basic information about the project, such as project whitepapers, token economics, partners, roadmaps, community, and other foundational elements. Read this article , How to DYOR before investing. However, misinformation spreads quickly, and anyone can submit their views or data on the web. Therefore, when conducting research, it is important to consider the source of your information and the context in which it is presented. Scams by mercenaries are commonplace, and projects or investors may spread false, biased, or promotional news as sincere, factual news.
4. Learn hedging crypto trading
What is hedging?
hedging is an investment strategy designed to reduce latent risks and losses that arise during adverse price movements in the market. It involves taking a primary trade in the direction you expect the market to go and then a second trade in the opposite direction. The idea here is that if the market goes against you, the second standby trade you make will make a profit and offset the loss on your first trade. A popular way for cryptocurrency investors to hedging trades is to go long or short on Future Market . This is where both parties agree to trade a particular asset at a predetermined price and date.
Going long: You think the price of an asset will rise, so you agree to buy the asset at today's price at a predetermined time in the future.
Short: You believe the price of an asset will fall, so you agree to sell it at today's price at a predetermined time in the future.
This unpredictability makes it difficult to know which direction the market will turn at any one time, which means that the crypto assets you invest in will most likely not always develop the way you hope. Hedging gives you peace of mind that no matter how the market moves, any losses suffered will not be as severe.
The Cryptocurrency market is constantly adapting and evolving, offering you ample opportunities to maximize your investments. These strategies are just a few of the ways to successfully scale your funds and give you the maximum potential for high investment returns based on the level of risk you are willing to take. But it is also key to remember the golden rule of investing: if you are concerned about the risk of your position, closing your position or reducing its size is the safer option. Remember: always invest and trade in an amount you can afford to lose.
This content is for informational purposes only and should not be construed as investment advice. Nothing mentioned in this article constitutes a recommendation or endorsement of any kind for buying or selling any crypto asset. Any trading by Financial Marekt involves risk and may result in loss in capital. Thorough research and seek professional advice should always be done before investing any funds.
About X Exchange
About X ExchangeX Exchange is a leading Web2.5 intelligent crypto asset trading platform. At X Exchange, we are committed to providing users with a more secure, efficient and convenient crypto asset trading experience through intelligent technology and Web2.5.
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