For various reasons, including its distinctive structure and the potential for large profits, cryptocurrency is gaining favour among investors.
Fifteen million Indians are currently exchanging digital currencies, and CoinSwitch Kuber’s platform alone has over 14 million users. This brings India up to speed with the United States, where 23 million individuals trade cryptocurrencies.
Even though most people are familiar with conventional currencies and assets, many potential investors are unaware of the vast array of investments available or how they work. Before investing, you should be informed of the volatile nature of cryptocurrencies and possible security, legal, accounting, and tax risks. We’ll go through the potential hazards of crypto investment and how to handle the risks of cryptocurrency trading in the following parts:
- Volatility is high
One of the variables that drive the crypto market is volatility. If you’re unfamiliar with the term “volatility,” it refers to unexpected fluctuations in market sentiment that may cause big and quick price movements.
Volatility isn’t limited to the cryptocurrency market. They can be found in other financial sectors, but the severity and spread are greater in the crypto realm. The significant volatility of the concerned asset class can be attributed to several factors, including its young structure compared to other types of investing.
However, there are a few tried-and-true strategies for dealing with it effectively. Later in the article, we’ll go over it in greater depth.
- Regulations are lacking
In 2021, the country’s legal stance on cryptocurrencies was quite tumultuous, with the ultimate question being “to regulate or not to regulate crypto assets.” While speculation and fake news about the topic caused the market to plummet, the government ultimately decided to hold the horses for the time being. There are substantial disparities in the legal foundation of digital currencies across regulatory authorities, which might influence the future of cryptocurrency in India.
On the one hand, regulators are concerned that criminals and terrorist groups may utilize bitcoin and other cryptocurrencies. On the other hand, some regulators advocated for a more accommodating regulatory approach, calling for more understanding and use-cases of the underlying technology.
Finally, there is little doubt that sound laws will improve investor protection and lower risks over time.
- Market Risks
Crypto assets, like other commodities, are vulnerable to market volatility. The hazards connected with bitcoin trading are divided into two categories: systematic risks and unsystematic risks. The systemic risk exists in all cryptocurrencies because the crypto markets are inherently risky. A change in the company’s fundamentals might be an example of unsystematic risk exclusive to a single crypto asset.
- Tax-based concerns
The tax status of bitcoin investments and returns is a source of significant confusion. Bitcoins and other cryptocurrencies are considered assets in certain jurisdictions and cash in others, depending on the jurisdiction.
El Salvador, for example, has legalized Bitcoin as a form of payment. Trading in virtual currencies is permitted in several jurisdictions, including the US and Canada. On the other hand, China and Russia have made trade activities illegal.
Sales or value-added taxes may apply to purchases and transactions with digital money (VAT). Digital currency investors may need to seek tax guidance frequently, depending on where they are tangoing.
- Cyber Risks
While cryptocurrencies may herald a new era, it also has a less-publicized counterpart: criminality. Because cryptocurrencies are entirely decentralized, crypto holders’ cyber hygiene and security are essential.
In the crypto world, “abnormal disappearances” and ransomware assaults are both intricate and fast-moving dangers and newcomers to the ecosystem are frequent targets. As a result, it is vital to be aware of these risks before joining the crypto realm. It’s critical to be mindful of the security measures taken by the exchanges in which you invest and the precautions they employ.
Methods for Managing the Risks of Cryptocurrency Trading
- Do Your Own Research (DYOR)
‘Do your homework and only invest what you can afford to lose,’ says the first investment guideline. This guideline applies to all investments in general, not just cryptocurrency, and it is not advisable to invest without conducting research or consulting with an investment advisor.
- Recognize the reward-to-risk ratio
The reward to risk ratio tells you how much money you’ll make for every unit of currency you risk. Only invest what you’re willing to lose, and a ratio of 1:1.5 is deemed appropriate.
- Diversify your investment portfolio
Investing in several cryptocurrencies can assist in mitigating risk. The investment is distributed among numerous coins in a well-diversified portfolio, lessening the impact of volatility.
- Make a plan for how you’ll get in and out
Your trades’ entry and exit points are critical. A perfect entry is a cherry on top of an exemplary transaction, but you must consider both gains and losses when it comes to exits. As part of an efficient risk management strategy, you must also prepare your escape points.
- Excessive leverage was avoided
Traders frequently employ margin since it allows them to raise order size and go long or short. However, if you employ too much leverage, your trades will not have enough time to breathe, and you might lose all of your money if you are forced to liquidate.
- Choose quality above quantity while trading
The secret to effective trading is to prioritize quality over quantity. Market circumstances will not always be favourable to your plan. When markets move in one way, swing trading is more profitable, but automatic scalping is more beneficial when markets remain steady.
To identify successful deals, you must first determine which trading approach is suitable for you and what market circumstances are acceptable.
Final thoughts
The environment surrounding cryptocurrencies is fast-growing, as it is with any new and inventive technology. If you’re interested in this investing industry, you should be interested in more than simply the profits and volatility. It’s critical to understand how cryptocurrencies function, what they’re used for, and how the ecosystem surrounding them works before investing.
