Today few professionals can boast of an impeccable trading process with cryptocurrencies – there are many nuances. In our article we will talk about what risks are present in cryptocurrency trading and how to minimize them.
Some participants in the financial market prefer to choose assets with the lowest risk for work, relying on conservative trading strategies, without risking large amounts of funds. They choose a relatively quiet time for trading, preferring to earn, if not a lot, but then stably. Another category of traders adheres to the rule "Who does not take risks, does not drink champagne", choosing to trade crypto and taking for granted all the risks associated with this type of trading. Yes, an impressive profit is possible, but the loss of funds may also be a high probability.
Unlike currency pairs, stocks of popular domestic and foreign companies, metals, indices and other assets, cryptocurrency has difficulties in conducting fundamental analysis. First of all, this is due to the lack of proper control by financial regulators, which, in turn, is a consequence of the government’s rejection of a crypto asset as a full-fledged currency. Japan is an exception. Everything has been legal there since the beginning of 2017.
Note: according to the Law on Currency Regulation adopted by the Japanese Parliament, from April 1, 2017, cryptocurrency, in the frequency of Bitcoin, is a full-fledged means of payment of the state.
But so far, only Japan has distinguished itself in this matter. The vast majority of countries do not yet know how to interpret the concept of “cryptocurrency” from a financial point of view and, accordingly, do not understand how to control the circulation of digital assets. After all, the currency of any country and its turnover is the main regulatory tool and the fact that interest in crypto assets is growing with incredible progress suggests that they should be controlled by the relevant authorities.
The issue is being resolved and even has its first results. For example, South Korea, China, the United States, represented by regulators, banned ICOs and did not speak very flattering about digital assets, calling them an incomplete financial instrument. As a result of this, many cryptocurrency exchanges froze trade, and some completely left the market.
It is precisely such bans on the part of regulators of developed countries that affect the course of cryptocurrency and altcoins. And by and large, traders have only some difficulties in conducting trading due to such prohibitions, and do not listen to the views of reputable organizations. Most of them are bending their line, believing that if profit can still be achieved with cryptocurrency, then you need to do it. Another thing is when regulators move from warnings to actions, limiting the turnover of the digital currency as a whole. However, so far these are only assumptions.
Another risk associated with the “foundation” are cryptocurrency forks. News about upcoming forks excites the cryptocurrency community and often this affects the value of assets. Recall at least all the forks of Bitcoin in 2017 - the Bitcoin exchange rate fluctuated against this background in both directions. Someone was able to make money on this, but someone, alas, was burnt out. The market is the market.
In the case of trading in currency pairs, which include cryptocurrency, it is worth paying attention to the asset that is paired with crypto. This is usually the US dollar. In this case, the situation with it is fundamental for the formation of the exchange rate of a currency pair, and therefore the news background of the States should be studied with scrutinity.
Regardless of which asset for trading with leverage was chosen, it implies the use of borrowed funds not belonging to the trader in the trading process. The benefit is obvious - without having a large amount of money, you can start trading with assets of interest and, if everything goes well, it’s good to make money. And if something goes wrong? Risks increase in proportion to leverage. Therefore, to circumvent this point, we have no right.
The mechanism for using leverage is that the trader has the opportunity to work with funds that are several times larger than the actual amount in the account. Cryptocurrency brokers offer to use leverage, as a rule, from 2 to 5. By choosing, for example, a leverage of 1:3 and having $1,000 in the account, the trader has the ability to operate funds in the amount of $3,000.
With proper market forecasting, a transaction opened with borrowed funds can bring impressive profits, while there is a flip side to the coin - with a long drawdown, there is a risk of losing not only own but also borrowed funds.
However, this situation is clear to everyone who is somehow connected with work in the foreign exchange market. Just remember: when working with currency, metals, stocks, it is easier to conduct fundamental and technical analyzes due to the presence of a huge number of useful (sometimes not so) information. When working with cryptocurrency, as we determined earlier, it is not possible to rely on the news background, which means that the trader is unaware of how the asset will behave in the near future. Therefore, margin trading in this case has increased risks.
Note: not all cryptocurrency exchanges offer their customers to use the leverage service, defining this type of trading as especially risky. Among the popular exchanges that nevertheless give such an opportunity, it is worth mentioning Bitfinex, Cex.io, Magnr, Kraken, OKcoin and others.
Cryptocurrency exchanges and brokers
Specialized platforms for working with cryptocurrency are the corresponding exchanges that provide asset exchange and margin trading services. Not all, of course, provide the service of using leverage and for what reason - we have already found out earlier, but it is possible to buy or sell an asset here by observing the fluctuations in the value of the currency.
But do not forget that not so long ago, due to the militia of several states against cryptocurrencies, some large exchanges stopped their trading or hid the possibility of working with leverage. And in this case, it is quite difficult to predict how the situation with a particular site will develop. Large trading markets (for example, BTCC), which had more than one year of operation and could boast an impressive number of customers, were hit. Those exchanges that have resisted the anger of regulators today require a thorough check for lice. This is especially important for beginners who are just starting to get acquainted with cryptocurrency platforms. To this end, we regularly conduct a review of cryptocurrency exchanges, which everyone can see on our website.
Another option for trading cryptocurrency is to enter the financial market using forex brokers. Today, an increasing number of such companies offer their customers cryptocurrency trading. Here, assets are presented in the form of cryptocurrency CFDs, the main feature of which is not working with an actual asset, which would cost a trader a lot of money, but with a difference in asset prices. Each of the companies strives to outperform in the conditions of a competitor’s trade and offers “the most comfortable, convenient and favorable conditions for work”. Is this really so - a big question, because in this case, the broker himself and his reputation play a role.
Note: on our website you can read the latest reviews about popular brokers, find out the latest company news and choose the most suitable option for cooperation by conducting a comparative description of brokers according to the main criteria.
An important issue is the withdrawal of funds. It is one thing to peck at favorable working conditions and another thing is not to be able to derive honestly earned profit. Some exchanges do not work with fiat in principle, others allow you to carry out financial transactions exclusively in Bitcoin, while still others offer a wide range of electronic payment systems for customers to choose from, they charge a huge commission, after which the net profit like a cat cried. Study this question in advance so as not to be left with nothing.
Note to trader
The main thing that a trader should remember is that the cryptocurrency exchange is the psychology of the crowd. There is no clear algorithm for working with assets due to the fact that there is no regulation, which means that this market segment is out of control and anything can happen here. To follow the crowd is an ungrateful affair, because the decision of the majority is not supported by clear facts (the same news). Only the assumptions of the participants of the cryptocurrency community, and this, in fact, is nothing.
Nevertheless, while the world has divided into two camps: some believe that the future is behind crypto, others call it a soap bubble, the fact remains that you can make money here. The main thing to remember is that, as in any business related to finances, you need to “jump off” during. Moreover, everyone remembers the deplorable stories of famous financial projects - nothing lasts forever.
Author: Kate Solano, Forex-Ratings.com