Investing in cryptocurrency, like all other assets, can come with a variety of risks. While facing some degree of risk is unavoidable, there are many ways you can take action to minimize your risk and increase your chances of making gains on your cryptocurrency investments.
Market risk
When you think of cryptocurrency you think of market risk because cryptocurrencies are extremely volatile assets. Market risk is the possibility that you as an investor could suffer losses due to factors that can affect the financial markets you have invested in. Market risk can never be fully eliminated, but when working with volatile assets like cryptocurrencies, it is essential that you take measures to reduce your risk.
Tips
Diversification – This is the most common way to mitigate market risk and the old saying “don’t put all of your eggs in one basket” rings true when it comes to investing. Make sure you are investing in a variety of cryptocurrencies, preferably with varying amounts of volatility risk.
Research – Do it! Not only should you be actively be reading news about your current investments, but you should be looking at overall market trends that will no doubt affect your investment, too.
Regulatory risk
Regulatory risk is a huge issue that all crypto investors face. Regulatory risk is the risk you that there will be a change in laws and/or regulations that will impact a security, business, sector or market. For crypto investors, we have already endured shaky markets each time a major trading hub announces unfavorable regulations. On top of this, there is the risk of changes to the legality of cryptocurrencies on a larger scale.
Tips
Read the News – As an investor, there isn’t much you can do to avoid regulatory risk. Ensure you’re staying on top of cryptocurrency news so you’re able to intercept any potential changes to laws or regulations that will affect your investments.
Join communities – Another easy way to immerse yourself in crypto news is to join communities like Telegraph,Reddit, Bitcointalk and other social media websites where other investors are actively sharing the most trending information.
Liquidity risk
Liquidity risk is about the extent to which a market allows assets to be bought and sold at stable prices. Typically, lower liquidity results in a more volatile market, while higher liquidity creates a less volatile market, keeping prices more stable.
Making large transactions with cryptocurrency does not have the same effect on the market as using cash. For example, when someone makes a $1 million transaction with cash, the market can absorb the transaction and the value of the dollar will not spike or bottom out. However, the same transaction made with crypto will have a greater effect on the coins value. Due to the market’s lack of liquidity, the amount of any particular coin available on a certain exchange can run out and traders could be faced with increased transaction fees.
Tips
Diversification – Similar to market risk, you can combat liquidity risk by diversifying your assets. This way you’ll have some cryptocurrencies you can sell or trade right away in case you end up in a position that is not favorable to trade other assets or coins.
Plan your purchase – Just because an investment looked good yesterday doesn’t mean it will be a good one today. This doesn’t always mean that you should jump in head first each time a new opportunity arises, though. When investing in cryptocurrency, you need to take into consideration how easily you will be able to buy and sell each coin at any time.
Cybersecurity risk
If you’ve purchased cryptocurrency or participated in the crypto conversation online, it’s almost guaranteed you’ve seen the work of cyber criminals, even if you didn’t take the bait. Cybersecurity risk is the risk that your computer system’s hardware, software or information can be stolen or damaged. From phishing scams to targeted hacking, many crypto investors have fallen victim to cyber theft.
Tips
Smart storage – Storing your cryptocurrency appropriately is one of the best things you can do to avoid attacks from cyber criminals. Look into what wallet will work best for your needs and never carry a lot of cash on a mobile wallet.
Research – Keeps tabs on what’s going on in the ever-changing crypto world! New scams are popping up each day. Don’t click on links from individuals you don’t know and only navigate to websites that you know are reputable.
Fraud risk
While it’s true that there are still great opportunities for crypto investment, there are also plenty of horrible ones. Fraud risk is the risk that you will be deceived for someone else’s financial or personal gain. These scams can come in the form of investment schemes that are promoted across social media channels, to initial coin offerings set up just to steal your cash.
Tips
Manage your expectations – While it might seem like crypto is the place to turn $10 into $10,000 overnight, unfortunately, your chances of doing that are extremely low. Know that crypto is like other investments and smart investments can take time, discipline and a lot of research.
Find trusted information – No matter which way you look there is someone with an opinion who presents it as fact. Make sure you are sourcing information from people/organizations that have your best interest in mind and have a verifiable track record to support their claims.