Is Investing in Crypto Risky? We have an Answer
Investments = Risk.
Higher Risk = Higher Return.
Basic Fundamentals. Be it any class of investments- Stocks, Real Estate, Bonds, Hedge Fund or even CRYPTO it’s just the same. Each has different types and levels of risk, different regulations, a performance track record, and many more factors which influence investors choice.
We see Cryptocurrencies are surging in popularity, and with people rushing to invest, it is crucial to be informed about all the risks and concerns surrounding the market.
As the cryptocurrency market evolves, investing in virtual coins has become much easier than it used to be a few years ago. While investor interest has peaked after the cryptocurrency boom of 2020. The market has termed 2020 as the breakthrough year for cryptocurrencies, adding that the price boom observed last year is different from previous instances.
Even with THIS BOOM in the Crypto space, there are a few critical risks that investors worldwide have in mind. So Let’s cut all the noise around them.
1. Concrete Regulations, What do they mean?
The Cryptocurrency market is still very fresh and operating without any significant regulations in most countries. Unfortunately, many countries have failed to have a clear stance on the crypto market — creating an uncertain investing environment.
Although they appear to be enticing investing opportunities due to the absence of any firm taxation policy, this lack of action has made it easier for cryptocurrency to gain traction in terms of acceptance, but the future is ever-changing, cryptocurrencies will start getting accepted just like any other currency.
According to a study, when a country imposes new regulations — think tax treatments, securities law treatments, cybersecurity and anti-fraud measures — none of that affects price or trading volume. In fact, these regulations provide a safer environment for genuine investors than people interested in using cryptocurrencies for money laundering and other sorts of illegal activities get spooked.
2. Tech Runs the Show unlike “Central Banks”
- The cryptocurrency market is heavily reliant on technology.
- The coins are digitally mined, exchanged via smart wallet and kept in check using various systems. There is an absence of physical collaterals to back cryptocurrencies, unlike traditional investments.
- Modern central banks have always been the subject of controversy since their inception. On one hand, the concept of monopoly power is profoundly disturbing to many people. On another, the existence of an independent entity that has the capacity and power to manipulate an economy is even more disturbing.
For instance, Bitcoin claims that it is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or intermediaries that lack of central authority is the primary reason governments are afraid of cryptocurrency. It is based on the reality that the central bank’s manipulation of the money supply has induced recessions, unemployment and given rise to a global banking system based on profiteering and corruption.
3. Heavy Volatility, but Easier to Predict
The price of bitcoin is constantly changing!
Let’s go back and have a look
- And on December 17, 2017, the price topped $20,000 & after a few days on the 24th, buyers could not sell their investment for more than $14,626.
- November 6, 2018, one bitcoin was worth $6,461.01.
While investing in cryptocurrency remains a tricky space, the good part is that price movements are no longer unexplained or without logic.
For instance, wild price fluctuations that are frequent in the crypto trading space now have an underlying reason — be it a tweet from a big shot crypto backer or a country enforcing regulatory actions. Earlier, price movements in the crypto trading space were very hard to predict and driven mainly by factors that weren’t easily identifiable.
Another factor that has made cryptocurrency trade favourable is that more analysts are now offering insights on approaching the market, something that was not available a few years ago.
So how can you Manage these Risks?
That’s where risk management practices in crypto plays a significant role, right from
- DYOR on crypto coins
- Understanding Risk and Reward Ratio
- Identifying Entry and Exit Strategies
- Diversifying Crypto Portfolio
- Understanding your Risk Appetite
- Protecting Yourself with Stop Losses
Do look out for our Next article on the “Top 3 Risk Management Practices in Crypto”!