There are many reasons why an active trader might choose to use cryptocurrency exchanges. They allow for peer-to-peer trading with no centralized intermediary, which can greatly reduce fees and simplify the process of transferring funds between buyers and sellers.
There’s also the added benefit of anonymity if traders go this route since crypto transactions aren’t tied to any identification, and perhaps most importantly, they make it much easier for traders to move money in and out of fiat currencies.
On the other hand, many people aren’t comfortable even thinking about trading cryptocurrencies, because the whole thing is unknown and uncertain to them, and they are not ready to take the risk. So, today, we will focus a little more on the risks, and since many traders are aware of them, they decide to proceed with their actions.
Despite these conveniences, cryptocurrency exchanges present a number of risks that aren’t inherent to standard forex trading platforms. Here are some examples:
Extreme price volatility
In the traditional financial markets, equities rarely fluctuate by more than 2% in a single day. The same is true for most major currencies like the EUR, JPY, AUD, and GBP. Cryptocurrencies are known to be much more volatile, so it’s not uncommon to see exchange rates change by 10-20% or more from one minute to the next.
In extreme situations, this volatility has resulted in trades of more than 100% in a 24-hour period for some currencies. For instance, if a trader bought one BTC at a rate of $200 and then sold it at a price of $400 just a few hours later, this would represent an increase of 100% in that time frame. Also, if you compare BTC’s value through the years, you can see that there are a few points when the price goes really high and then drops below the average worth within a few days. There are so many factors that can affect the price, but it seems like Bitcoin is the most popular, but most volatile currency. The same goes for the popular cryptocurrencies too, because the more popular they are, the more factors can affect their price. That’s a reality we must accept, so we can get to know this market better, and limit the risks we put on it.
It should be noted that these sorts of price swings aren’t exclusive to the crypto market. There are times when equities will see large movements over a short period, even with major currencies, but this is generally rarer than it is in the cryptocurrency world.
Extreme low liquidity levels
When traders are looking to buy or sell currency pairs on traditional financial markets, they can count on the exchanges to provide enough liquidity to easily make those transactions.
For crypto exchanges, like bitcoinera.app, this isn’t always the case. Sometimes there will be too few traders and market makers looking to transact, and as a result, these orders may take longer than desired to complete.
In other cases, there’s simply too much interest for the existing market infrastructure to handle. This was a major issue during Bitcoin’s meteoric rise at the end of 2017, and there were many reports of traders having to wait more than 30 minutes just to open new positions on their accounts.
Exchange downtime on critical market dates
Just like traditional markets, it’s possible for cryptocurrency exchanges to close unexpectedly or without warning on specific days. This has happened several times over the past few years, and it’s a result of some exchanges being forced to take their sites offline or shut down altogether due to a DDoS attack on the site’s servers.
In one instance from late 2017, South Korean cryptocurrency exchange Youbit was hacked two times in a single month, resulting in the loss of 17% of its digital assets. It was forced to declare bankruptcy soon afterward.
If a trader is holding positions at a time when an exchange goes offline, it may mean a significant loss in profits or even a trade that’s not settled at all if the site isn’t back up and running within 12 hours after the market closes.
Lack of regulation
The cryptocurrency market is known for its wild price swings, flash crashes, and instances of fraud. As a result, it lacks the level of regulation that other financial markets like forex enjoy.
If traders are looking to avoid any sort of delay or inconvenience when trading cryptocurrencies, they should consider using brokers who offer fiat currency trading. These platforms are regulated by local governments, which ensures that all transactions are secure and backed by sufficient liquidity.
Also, it’s worth mentioning that there are still countries around the world that won’t regulate the crypto market in any way, and they have laws and policies against it. That means, trading is considered an illegal activity, and those who trade can face some legal consequences too.
Some of the savings can be lost forever
It’s so easy to erase some data today or damage the device you use to trade. According to the experts, there are plenty of cryptocurrencies lost in damaged discs, phones, wallets, and computers. Even though it rarely happens, we shouldn’t ignore that risk. That’s why experienced traders use more than one e-wallet to split their amount, so if they lose one, the damage won’t be that big, as if they lose the one with all the money on it. This is really unpleasant to even think about it, but we are sure that every trader will behave with a huge responsibility to their belongings, so they can save the money. Be careful where and how you store your cryptocurrencies, and make a plan in case of crisis. That will help you sleep better at night.
While these are some of the risks that are associated with cryptocurrencies, there are so many benefits as well. As a matter of fact, the benefits outweigh the risks. Surely, every money job comes with plenty of risks, but what can we say is that when we talk about cryptocurrencies, we also talk about great potential profits, fast transactions, and availability all around the world. So, before you enter this market, you need to detect both the risks and benefits and see what will work better for you. Yes, this market is volatile and unsure, but life is just the same. Don’t do that because all of your friends are trading. Do it just for yourself and be ready to take all the risks that come, so you can be sure everything is done properly.