Cryptocurrencies have endured their fair share of ups and downs and are still evolving. Confidence in the economic future of cryptocurrencies is growing, but the market is still risky.
If you want to understand the cryptocurrency market better and be able to make sense of some of its movements, knowing what to watch for is a good first step:
For years now there has been a lot of hype in the cryptocurrency market. Predictions about surging prices are all too common. While the hype isn’t necessarily a bad thing, the fact that it can cause significant fluctuations in the market is a risk. The hype itself can make the price of a cryptocurrency surge, but it can also bring it crashing down.
Overall the cryptocurrency market is very volatile. Fluctuations in the price of cryptocurrencies are not only frequent but also much higher than most other markets.
There are many reasons why the market is so volatile. The biggest problem is that the market is much smaller in size compared to established forms of currency. This means that even small movements of a cryptocurrency can have a pronounced effect on its price.
Many smaller cryptocurrencies suffer from low liquidity – as did Bitcoin in the not too distant past. It contributes to the volatility of the market, seeing as there is the risk of price manipulation or a big player influencing the price heavily with a single massive sale. Cryptocurrency wealth distribution is even more skewed than that of traditional wealth, only a few with large stakes in a cryptocurrency, also called bitcoin whales, can hold disproportionate amounts of power over its pricing.
Fortunately, as time goes by this risk tends to get lower. That being said it remains high in new cryptocurrencies until they’re able to gain more acceptance and popularity.
In the last few years, there has been a sharp increase in the regulation of cryptocurrencies. That has put a dampener on it, as the market is unsure how to react to the new regulations that are starting to be put into place.
The risk of regulations varies depending on the type of regulations that are being implemented. Needless to say, banning cryptocurrency ownership or trading is going to adversely affect the market, but simply restricting or subjecting it to oversight isn’t likely to have a lasting impact.
Although cryptocurrencies are secure in themselves, the exchanges that trade them have been shown to be a vulnerable time and time again. On top of that, the security of your wallet is in your own hands, and it is up to you to protect it.
Arguably the security risk of cryptocurrencies is not that much worse than any other online platform. In general, as long as you take measures to protect your wallet and only trade on reputable exchanges – you should not have to worry too much about it.
See how these risks can affect your decisions if you choose to trade Bitcoin or some other cryptocurrency? Now that you know what the risks are, you can take steps to avoid them. At very least you should be able to mitigate most of the risks if you are proactive enough.
The fact that there are risks present in cryptocurrency should come as no surprise, and it is the same for the trading of any commodity or currency really. At the end of the day, it is up to you to understand the risks that you’re exposed to and make sure they are within acceptable margins.