The risks in the cryptocurrency market are about the same as in any other. Only on the first one, everything can happen much more unpredictably and faster
The crypto market is very volatile, it carries a high risk when trading. The risk in trading is the maximum loss expressed as a percentage or in absolute relation to the size of the deposit, which the trader can receive in the event of an unfavourable development of events.
Before starting crypto trading, it is important to understand the risks associated with it. Their management plays a key role in preserving the trader’s capital, ensuring the stability of his investments. At the same time, it is very important to know about cryptocurrency exchange platform development to understand the level of security.
About risks in crypto trading
The risks in the cryptocurrency market are about the same as in any other. Only on the first one, everything can happen much more unpredictably and faster.
It is important to understand that opening large trading positions with high risk, and expecting a constant profit, is a sure way to lose finances. Each trader decides for himself when to enter and exit a position, what exactly to risk. Therefore, with the help of crypto exchange software, it is important to develop a trading plan that takes into account trading risks as much as possible. On the other hand, by understanding how to start a crypto exchange, you will be able to answer the question of how safe they are for trading.
Volatility
Due to the high volatility of the crypto market, it often experiences sharp price jumps within short periods of time. In the real world, crypto is not widely used, prices can change irrationally. This can happen for a variety of reasons (both obvious and non-obvious), based on emotion and fear rather than technical trading patterns or fundamental data.
A change in the price of an asset is the most expected and simplest risk.
Fractures
10 years ago, the Japanese exchange MtGox closed. It processed nearly 80 per cent of all international bitcoin transactions. Moreover, 850,000 bitcoins (worth about half a billion dollars) disappeared from her virtual vaults. And when Coincheck was hacked in the same Japan 6 years ago, over $500 million worth of digital currency was stolen.
In general, there are many successful attempts to hack crypto exchanges. This is a good reason to consider trading CFD digital coins instead of buying real crypto on exchanges: in this case, competitive conditions are offered in a contract for difference, under a contract between two parties – the seller and the buyer.
Landslides
The volatility of the crypto market leads to huge crashes. So, 6 years ago, the total market capitalization of crypts decreased by more than $700 billion due to the considerable problems faced by cryptocurrencies:
- initial illegal coin offerings;
- tax evasion;
- money laundering;
- failures in exchange operations;
- cyber theft;
- high threshold of speculativeness.
Operational risk
This is the risk of not being able to perform trading operations, as well as put or withdraw money on deposit. This happens, as a rule, when:
- data leaks;
- technical failures;
- hacker attacks on the stock exchange.
However, the situation where the crypto exchange itself is a scam should also not be included.
Liquidity risk
It becomes impossible to enter into a deal at the best price or to convert funds into cash/fiat currency when the asset’s liquidity drops. Such a risk arises if one party is ready to enter into an agreement, but there are no people willing to enter into it.
How to minimize risks
How to trade in the plus, if so many pitfalls can fall on the trader at once?
There are basic principles that will help reduce the risks of trading cryptocurrencies. All of them are useful, but depending on the trading strategy, some may be more useful, some less.
Let’s consider the main recommendations that are suitable for trading on the cryptocurrency exchange.
We compare risk and profit
It is important for the trader to remember what will happen if the trade goes against him. It is always necessary to limit the risk, not to risk more than 10 per cent of the deposit. It is worth using limit orders or stop losses, risking only a small part of the deposit. In the worst-case scenario, the trader will lose only a tenth of the capital. The type of closing order depends on the exchange where the trade takes place.
If the total risk should be limited to 10 per cent of the capital, only 5 per cent of the finances should be invested in one crypto.
As a rule, the more profit an asset promises, the riskier it is. If a high-risk asset does not promise significant returns, there is no point in investing in it. But even with promising offers, you should be more careful and in no case invest all your money in them.
About diversification
One of the methods of minimizing risk is portfolio diversification by assets. This method logically follows from the previous one.
Diversifying investments between different cryptocurrencies helps reduce risk and increase the stability of a trader’s portfolio. Selection of various assets with different characteristics – protection of investment from market volatility.
But it is important to understand: it works only if you diversify assets that are not closely interconnected. So, buying shares of Visa and MasterCard on the regular stock market is not diversification, since these companies are similar and operate in the same field. What affects one will most likely similarly affect the other.
We are entering the crypto market in stages
It is not necessary to immediately carry all your savings to the crypto market: there is a great risk of succumbing to panic or believing in a dubious scheme of quick earnings and losing everything. You can, for example, buy bitcoins for $10 a day and gradually replenish your investment portfolio.
Risk management
If you are more interested in intraday or medium-term trading, the best option is to use stop orders: they will help you save at least part of the profit during the worst schedule.
If long-term trading is chosen, the main risk protection tools are phased entry plus portfolio diversification.
We calculate the risk for a trading position
This is a whole science using mathematical formulas and percentage ratios.
Kelly’s formulas and Elder’s rules are suitable for more experienced traders who keep track of trades and have learned how to analyze historical data. For novice traders, it is enough to follow the general principles of position calculation, and later it will be possible to develop your strategy and risk management tools.
Conclusion
It doesn’t matter how a trader decides to invest in crypto: buy and hold or trade, making money on speculative deals – there is no way to do it without risk management. It is risk management that reduces the chances of getting burned out, and increases the possibility of really multiplying your wealth by investing in a risky deal or an unpromising asset.
What prevents a novice trader from learning crypto trading well? Nothing. It is necessary to learn as much as possible about the blockchain platform, familiarize yourself with the news of the project, and create a trading system that will allow you to benefit from the price fluctuations of the selected asset.
Many interesting trading systems on the Internet allow you to earn even during the day on the fluctuations of the crypto exchange rate. Crypto exchange software will be an excellent assistant.
It is important to monitor the price spikes, to be in time to buy ethers and bitcoins during price dips to benefit from the next impulse growth. And, of course, don’t forget about the risks.
