Cryptocurrencies are quickly growing in popularity, but this doesn’t mean that the market has no risks. On the contrary, trading in cryptocurrencies can be extremely risky if you don’t know what you’re doing, so it’s essential to know and understand the risks before you start investing.
Once you know what these risks are, it’s easy to mitigate them and reap the financial rewards of crypto trading. Here are some of the most common risks of crypto trading and how to manage them.
What Are the Types of Risks in Cryptocurrency Trading?
There are two types of risk in cryptocurrency trading. First, there is market risk. This is where you buy or sell too late or early, and you lose money on market fluctuations. Secondly, there is a behavioral risk. If you hold an altcoin or ICO token that becomes worthless—and you don’t want to sell it because you think it might increase in value again—you may not be able to trade anymore.
One strategy that most new investors get wrong is taking on too much leverage. Take a look at your portfolio. Look at all your positions, both long and short. How much leverage do you have? Ideally, you want your portfolio balanced so that it’s not too risky; otherwise, one big loss could wipe out all your gains in cryptocurrency.
Investors are exposed to market risk when trading cryptocurrencies. Cryptocurrencies are volatile, which means prices will rise or fall depending on global events. An investor could lose his or her entire investment capital within days. The price changes can be so drastic that investors may even begin selling their homes to purchase cryptocurrencies. Therefore, investors need to consider whether they can withstand such fluctuations before investing in cryptocurrencies.
Position Sizing Risk
Position sizing is an important concept best learned through real-world experience. The easiest way to explain position sizing is by example. If you have $1000 and want to invest in a coin worth $1, you can buy a single unit. If you have 10% of your portfolio in crypto, say $10k, and one coin costs $5, it would be smart not to risk more than 1% on that one trade.
Economic & Political Risks
Government intervention in cryptocurrency markets. There have been rumors for years about governments wanting to ban cryptocurrencies altogether. While there is no reason to believe that a ban on digital currencies will ever come from a major country like China, Japan, or South Korea, it would not be surprising if smaller countries decided to take unilateral action against digital currencies. Regulations from individual states in larger countries could also prove problematic for exchanges looking at supporting both fiat currencies and cryptocurrencies alike.
If you want to know how to mine Bitcoin, according to SoFi, “When prices rise, this gives more people motivation to mine for coins.” If you want to mine bitcoin, we recommend mining in a pool with others. Solo mining is not a recommendation at all. Pool mining is safer and gives steadier payouts than solo mining. Mining pools are groups of miners that work together to solve blocks faster and split the reward between themselves. It’s far more convenient than solo mining because there’s no need for configuration or setting up a miner client on your computer.
Cryptocurrency is a volatile asset class that can rise or fall 50% or more in a month. We call this high beta, meaning it has a high sensitivity to market movements compared with traditional assets like stocks and bonds.