While most people are familiar with cryptocurrencies and their prospects, budding crypto investors are unaware of the myriad of potential risks associated with futures crypto trading.
Over the last decade, cryptocurrency has exploded in popularity, and almost everyone is talking about or investing in them. Crypto trading, on the other hand, are unlike any other in the financial system. They defy established investment trends and are prone to the culmination of risks from wild cryptocurrency’s volatility
Today, there are over 10,000 cryptocurrencies and a plethora of cryptocurrency exchanges, with new ones being added daily. That is a lot to take in, particularly for new investors.
In this article, we will discuss the most significant risks that both novice and experienced crypto investors should stay woke to in the future wildly volatile crypto market.
Top Risks Associated With Futures Crypto Trading
Cryptocurrencies, in contrast to fiat money, are not supported by governments or banks, making them highly speculative. A blockchain is a public ledger that records all cryptocurrency transactions. The public ledger system of cryptocurrencies makes them a reliable and secure system.
However, the decentralized nature of cryptocurrency, coupled with the anonymity it provides, poses risks, even if the blockchain helps with crypto security. Investment in cryptocurrency entails several dangers which include the following:
Volatility
Volatility is a key financial indicator, and cryptocurrencies are among the most volatile investments out there.
When the value of Dogecoin (DOGE) surged in early 2021, it lost over a third of its value by May 2021. The price of the cryptocurrency shot up and down as a result of wild speculation about its future.
There is a lot of speculation going on in the cryptocurrency market, with some investors rushing to buy and sell as soon as there is a price drop. A cryptocurrency’s value can fall precipitously if a single unfavorable tweet or piece of news is circulated about it.
Even so, there are signs that the cryptocurrency market’s volatility is improving. Most cryptocurrencies have recently been acquired by large trading and investment firms. Due to the stabilizing influence of these major companies, those cryptocurrencies may begin to exhibit healthy volatility.
Cyber Thefts And Hacks
Digital wallets are used to store cryptocurrency, and crypto exchanges are used to transact with it. Cybercriminals are drawn to the anonymity and online dependency of cryptocurrencies. Phishing is one method criminals use to get into cryptocurrency wallets and trading platforms.
Cryptocurrency investors, whether individuals or businesses, must follow stringent internet security protocols to protect their assets. It is also a good idea to keep up with the latest threats and learn how to safeguard your crypto-assets and crypto-wallets.
Decentralization
One of the most appealing aspects of cryptocurrency is that it is decentralized.
However, when things go awry, this absence can have a negative impact. Financial institutions typically back and mediate electronic money transfers in most online financial transactions. It is easy to get in touch with them if something goes wrong during the transaction.
This cannot be done with a cryptocurrency transaction. It is difficult to identify the correct entity with which to file a dispute because of its decentralized nature. Therefore, most cryptocurrency investors are urged to trade on reputable digital currency exchanges.
The majority of the top exchanges offer great customer service that can assist with virtually any issue. Nonetheless, because the majority of cryptocurrencies are decentralized, resolving legal disputes is nearly impossible.
Risks Associated With Peer-to-Peer Transactions
Peer-to-peer (P2P) platforms are a type of cryptocurrency exchange where buyers and sellers can communicate directly with one another. All transactions on P2P exchange are settled directly between the parties involved.
One of the simplest methods for converting cryptocurrency to fiat money is to use one of these exchanges. Human error or carelessness, on the other hand, can result in the loss of your most valuable asset. Scams and fraudulent schemes, such as buyers refusing to pay for cryptocurrencies received or sellers refusing to send the tokens, are always a possibility.
The best way to avoid most of these scams is to find a P2P platform that offers a digital asset escrow service. During the transaction, the platform holds cryptocurrencies. Once the buyer has completed the payment process and the seller has confirmed receipt, the asset will be made available to the buyer. This ensures that both parties receive their desired outcomes. A platform representative will settle any disputes that may arise.
Loss Or Destruction Of Private Keys
A cryptographic system that uses two keys to authenticate transactions is used in the creation of cryptocurrencies. There are two types of keys: a public key and a private key, both of which are used to identify and authenticate the holder of each. An individual’s private key is created automatically when they open a cryptocurrency wallet.
If a private wallet key is lost, any cryptocurrencies held in that wallet are no longer accessible. The loss or destruction of private keys accounts for approximately 20% of all Bitcoin losses. If you don’t keep a copy of your private keys on a secure and isolated computer, you run the risk of losing them. If your private key is not encrypted, do not store it online, even if it is in an encrypted format.
Unregulated Crypto Exchange/Platform
As a result of the rising demand for cryptocurrencies, the number of exchanges and trading platforms has increased dramatically. It has become more difficult to choose an exchange as a result. Unlike traditional financial institutions, cryptocurrency exchanges provide the same level of service to the financial market.
Crypto trading is becoming increasingly popular because of a lack of regulation. To this end, predatory practices may be employed by unregulated trading exchanges that charge exorbitant fees and have no policies in place to prevent manipulative or suspicious trading.
While some exchanges charge exorbitant commissions, others make it difficult to withdraw funds. Others may be vulnerable to scammers, making it easy for them to rob you of your money.
Find trading platforms and exchanges that have a good reputation for security and good reviews. To avoid platforms that make unrealistic promises, always read the fine print in their terms of service.
Regional Regulation
Cryptocurrency’s future growth is at risk because of government regulation. Regulators from all over the world have put restrictions on how and where people can use cryptocurrencies. Governments around the world are concerned that cryptocurrencies could be used to evade financial regulations and facilitate the laundering of illicit funds.
While most governments are still exploring the possibility of incorporating digital currencies into the framework of their current fiat currency systems, Cryptocurrencies have become popular in some countries, such as El Salvador, which has launched or plans to launch its cryptocurrency. Still, legislation that restricts the use of cryptocurrency is a high probability.
Ways To Mitigate Risks In Future Crypto Trading
Do Your Research
“Do your homework and only invest what you can afford to lose,” says the first investment rule. This rule applies to all investments, not just cryptocurrencies. So, if you’re going to invest, it is best to do your research and talk to an investment professional first.
Understand The Reward/Risk Ratio
For each unit of currency, you are put at risk and the reward to risk ratio tells you how much money is in your bank account to gain. Only invest what you can afford to lose. A ratio of one to one and a half is thought to be reasonable.
Diversity of Your Crypto Portfolio
It is possible that diversifying your cryptocurrency holdings can reduce your risk exposure. An investment in a well-diversified portfolio reduces the impact of volatility because the investment is spread across multiple coins.
Determine Your Entry And Exit Strategies
It is important to consider where you will enter and exit a trade. As with any good deal, you need to consider both gains and losses when deciding on whether or not to buy or sell. Effective risk management calls for a well-thought-out strategy for your exits.
Trade Quality Over Quantity
The secret to successful crypto trading is to emphasize quality rather than quantity. Your strategy may not work in all market conditions. In a volatile market, swing trading is more profitable, while automated scalping is more profitable.
Conclusion
The cryptocurrency ecosystem is rapidly evolving, as is the case with any new and innovative technology. As a potential investor, you should be swayed by more than just the potential returns and volatility. Before delving into crypto trading in the future, it is essential to understand how they work, what they are used for, and how the ecosystem surrounding them works.
