Cryptocurrencies are very new to the financial markets and the speed at which they grew has attracted a lot of attention both from professional traders as well as people who are new to financial markets and cryptocurrencies. This fast growth, the way crypto works, and its unregulated and decentralized nature have created some risks that are always present in the crypto market, so what are these risks exactly?

Volatility

Volatility is one of the biggest risks of cryptocurrency trading and a large number of traders fall victim to this unpredictable side of crypto. Since cryptocurrencies are not backed by any hard assets, such as gold, their prices are purely speculative. This makes them highly volatile and their prices can change significantly throughout the day without any apparent reason behind this change, other than more people deciding to sell than buy. 

This volatility brings opportunities for good profits, but it also brings risks of suffering huge losses, especially for those who are inexperienced with trading financial assets. You can open a long position as the price has been going up, but then suddenly out of nowhere the price can start to drop, and you might suffer big losses. These losses will be amplified if you use leverage, which is what a large number of newcomers use as they think it is the best way to make fast profits. 

How to avoid volatility

Well, there is no way to avoid volatility in crypto as this is the nature of the market. But there are some steps that traders can take in order to limit their exposure to the negative sides of volatility. One of the most useful steps that traders can take is implementing stop-loss order when trading with cryptocurrencies. With stop-loss orders, traders can set the maximum amount of loss that they are willing to suffer, and if the price drops really sharply, they will be safe from losing all of their trading capital. 

The amount at which a stop-loss should be set depends on the size of the order, the cryptocurrency you are trading with, and how much of a loss you are willing to suffer without it having any significant impact on your future trades.

Scammers

Cryptocurrencies are notorious for attracting a huge number of scammers. This is thanks to the fact that crypto and blockchain bring some level of anonymity. Because of this, one of the biggest risks when trading with cryptocurrencies is the large number of scammers that lurk on the market. There are scammers that create fake websites that resemble legitimate trading platforms with similar URLs and make slight changes that will be hard to spot. With this, they then distribute these websites across the web and there will always be someone who will mistake it for a legitimate platform. There are also scammers who try to sell fake trading signals or automated trading robots. The crypto space is attracting people who are unfamiliar with financial markets and these newcomers are looking for every available tool or tip that will help them make their trading activity more profitable. This is where these scammers are trying to take advantage by selling trading signals, robots, and other similar tools that are not effective at all. These are just some examples, and there are quite a few different types of scams that are going on in the crypto space that you should investigate before dipping your toes into this market.

How to avoid scammers

When it comes to avoiding being scammed when trading with cryptocurrencies, there are several steps that you can take. One of the first steps that individuals can take in order to not fall victim to trading scams is to follow one famous saying, “If it is too good to be true, it probably is”. There is no one that will provide you with services, advice, tools, or free money without them also receiving something of equal or more value in return. So when you spot something really good, always double-check if it actually is what it advertises to be. Think about it, if someone was actually making so much money trading, why would they be out there punting something that will make them less money than they can make from just using the info they claim to provide? 

Another way to avoid being scammed when trading with cryptocurrencies is to not believe everyone online. When someone engages in communication with you and starts offering certain services or ways of making money quickly, we would suggest discontinuing communication with them immediately, as 9 out of 10 times these will be scammers trying to take advantage of you. Other than this, simply taking basic precautions of not sharing any of your personal information, not visiting sketchy sites, not engaging in communications with strangers, and so on, will be enough to protect you from most scamming practices. 

Regulatory uncertainty

One of the biggest thorns that poke the cryptocurrency ecosystem every day is the regulatory uncertainty around them. Cryptocurrencies are very new to the financial markets when comparing them to Forex, stocks, and commodities. Because of this most governments and regulatory bodies are still figuring out how to approach this new asset class. This is made harder with cryptocurrencies carrying a certain level of anonymity and being decentralized by nature. This makes regulating these assets really challenging and this uncertainty brings some challenges when trading with them. Since there are no clear guidelines, each country approaches them differently and they might change laws around them pretty frequently. Because of this when trading you might break certain laws without you realizing it. The most common example of this comes from unclear guidelines on crypto taxes. Most people know that cryptocurrencies are rarely taxed and when they are, it seems easy to avoid paying these taxes. This creates very big challenges and you always need to be on your toes when trading with crypto if there are certain regulations in place.

How to avoid regulatory uncertainty

There is no way of avoiding regulations, but there are some basic steps that everyone should take which will make it much easier to trade cryptocurrencies and still comply with these regulations. One of the first steps should be to contact regulatory authorities and ask them some necessary questions that you might have. These regulators also publish these regulations in the form of written papers where they explain what you can and can not do with cryptocurrencies, so reading up on this is very important. Other than that, you should be on the lookout for these regulations and always check if there is something new that has been introduced. 

Cryptocurrencies are highly volatile assets that carry anonymity and decentralization. Combine this with the fact that these are very new assets and there is not a lot of knowledge about them, trading with these assets carries certain risks, such as falling victim to volatility, being scammed, or having problems with regulations. The existence of these risks should not scare you away entirely, as risks are present in every financial market and it is our job as traders to be able to manage these risks and do everything in our power to avoid falling victim to them.

"Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin— People have made fortunes off Bitcoin, some have lost money. It is volatile, but people make money off of volatility too." - Richard Branson

In the case of cryptocurrencies, these risks might be higher than with other financial assets, but compared to these assets, cryptocurrencies bring possibilities of making much larger profits with much less capital investment. With this in mind, these risks are somewhat justified and we should be ready to risk more in order to make more.