Different types of crypto trading and investment risks in 2022 and the effective mitigators

While most people are familiar with common currencies and assets, potential investors are unaware of the vast array of assets available or how they work.

Before you invest, you should be aware of the volatile nature of various cryptocurrencies and potential security, legal, accounting, and tax concerns. In the subsequent sections, We’ll go over the potential risks in crypto investing and ways to manage the risks involved in cryptocurrency trading.

High volatility

Volatility is one of the factors driving the crypto market. If you don’t know what volatility means, it is the sudden shifts in market sentiment that can result in significant and rapid price movements.

Volatility is not something that is only concerned with the crypto market. They are visible in other financial sectors, but the intensity and spread are higher in the crypto space. There are several reasons for the high volatility in the concerned asset class, including its nascent schematics as compared to other forms of investment.

But there are a few reliable and relevant methods to deal with it like a boss. Let’s go over it in more detail later in the article.

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Lack of regulations
The legal stance of cryptocurrencies took quite a tumultuous ride in the country in 2021, with the ultimate question, “to regulate or not to regulate crypto assets.” While speculation and fake news regarding the topic made the market plunge, the government eventually chose to hold back the horses for now.

Ultimately, there is no denying that good regulations will help enhance investor protection and reduce risks in the long term.

Market risks

Like other commodities, crypto assets are exposed to risks arising from market movement. There are two types of risks associated with cryptocurrency trading, i.e., systematic risks and unsystematic risks. The systematic risk is present in all cryptocurrencies because it is inherent in the crypto markets. Unsystematic risk, which is particular to a single crypto asset, could involve a change in the company’s fundamentals.

Tax-based concerns

There is some uncertainty regarding the tax status of cryptocurrency investments and returns. Depending on the jurisdiction, bitcoins and other cryptocurrencies may be classified as assets in certain countries and as currency in others.

For example, El Salvador has made Bitcoin a legal tender. Whereas in countries like the US and Canada, trading in virtual currencies is legal. On the other hand, China and Russia have even prohibited trading practices.

Purchases and transactions in digital currency, for example, may be subject to sales or value-added taxes (VAT). Depending on where they tango, digital currency investors may need to seek tax advice on a regular basis.

Cyber risks

While cryptocurrency might be the dawn of a new age, it also has a lesser-known counterpart: cybercrime. Since cryptocurrencies are fully decentralized, the crypto holders’ cyber hygiene and safeguards are number #1 priority.

“Unusual disappearances” and ransomware attacks are both complicated and fast-moving threats in the crypto environment, and newbies to the crypto ecosystem often become a target. So, before entering the crypto world, it is necessary to be aware of these dangers.

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Ways to manage the risks involved in cryptocurrency trading
Do Your Own Research (DYOR)

Remember the first investment rule, i.e., ‘Do your homework and only invest what you can afford to lose’. This rule is not just for cryptocurrencies but for all investments in general. Investing without research or diving into the investment pool without speaking with an investment professional is not recommended.

Understand the Reward/Risk ratio

The reward to risk ratio indicates how much money you stand to gain for each unit of currency you risk. Invest only as much as you’re willing to lose. A 1:1.5 ratio is considered reasonable.

Diversify your portfolio

Investing in a variety of cryptocurrencies may help to reduce risk. With a well-diversified portfolio, the investment is spread across several coins, reducing the impact of volatility.

Determine your entrance and exit strategies

The entry and exit points of your trades are crucial. A perfect entry is a cherry on top of a good transaction, but you must weigh both gains and losses with exits. You must also plan your exit points as part of an effective risk management strategy.

Avoided excessive leverage

Traders commonly use margin because it increases order size and allows them to go long or short.

However, if you use too much leverage, your trades will not have enough time to breathe, and you may lose your entire investment during forced liquidation.

Choose trading quality over quantity

Prioritizing quality over quantity is the key to successful trading. Not all market conditions will be favourable to your strategy. Swing trading is more profitable when markets move in one direction, but automated scalping is more profitable when markets are stable.

To find good trades, you must first determine which trading strategy suits you best and determine the appropriate market conditions.

Disclaimer: While crypto trading can be fun, investing is a more bankable strategy in a volatile space like crypto.

Final thoughts

As with any new and innovative technology, the ecosystem surrounding cryptocurrencies is rapidly evolving. If this investment sector appeals to you, you should be drawn in by more than just the gains and volatility. Before investing, it’s crucial to understand how cryptocurrencies work, what they’re for, and how the ecosystem around them works.

Disclaimer
: The above content is non-editorial, and TIL hereby disclaims any and all warranties, expressed or implied, relating to the same. TIL does not guarantee, vouch for or necessarily endorse any of the above content, nor is it responsible for them in any manner whatsoever. The article does not constitute investment advice. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified.