A cryptocurrency word can be split into two parts crypto which suggests hidden and currency which implies a medium of exchange. It is a digital or virtual currency that is secured by cryptography (Blockchain technology). It aims for an alternate financial system and is not dependent on any institute or software. It has no limit in transactions or volume. Its idea is to either replace the paper currency or to be looked upon as an investment. It’s also popularly referred to as digital gold.
It is made by strong cryptography over various computer networks. Cryptocurrency is a Blockchain product. Cryptocurrency is decentralized in nature, meaning it’s not governed by any central authority. It enjoys zero interference due to no regulation.
The first cryptocurrency, Bitcoin was launched in 2009 and now there are over thousand other currencies trading on this platform. Bitcoin is the most famous cryptocurrency and has always been in the news for quite a few years now. Etherium, Dogecoin, etc. are some other known currencies of crypto.
Why is cryptocurrency trending?
Cryptocurrency lately, is one of the most popular topics trending over the internet. People who use the web have at least heard about the term ‘cryptocurrency’ or ‘bitcoin’ even if they do not know the actual meaning. Every other influencer on the internet is either talking about crypto or promoting its apps. What is this buzz all about? Well, there are not one but many reasons for it. Let’s go through them one by one!
In terms of cryptocurrency legality in India, Crypto is not regulated but also not illegal. There is a tax on cryptocurrency in India which is applied to your purchase. Many apps and websites are launched where cryptocurrencies can be traded. These apps and sites are made visible to the audience through digital and influencer marketing.
Many crypto traders are teaching crypto through their courses and youtube which again catches the attention of people on the web.
Legalizing bitcoin and cryptocurrency is a never-ending debate. Many countries have banned it but the US is trying to regulate it. The debate continues as the countries, big business tycoons, profit & loss-makers talk against each other therefore creating more hype.
These are some of the reasons why crypto is trending. Bitcoin might or might not be the ‘next big thing’ but one thing is for sure, if you don’t consider the risk, you’ll eventually fall. You’ll see plenty of channels talking about ‘why you ought to invest in crypto’ but there are only a few who speak about the risk associated with it. So be aware and decide what’s best for you.
Mining difficulty only increases with more competition and is dynamic thus ensuring that mining will always remain profitable as long as Bitcoin remains more fungible than digital fiat.
Cryptocurrencies are generally termed speculative investments. Thus, prices of the most popular currencies have become increasingly volatile in the past few months.
What are the risks associated with cryptocurrency?
Highly volatile: The Volatility of the crypto market is extremely high. The price fluctuations are extremely high. Moreover, there can’t be accurate reasoning behind the fluctuations or volatility. Due to the unstable characteristic of cryptocurrency, there’s reluctance among people to invest in it.
Irreversible transactions: Transactions occur in a couple of minutes. Once the transaction is performed, it cannot be reversed unless the other person is willing to do the same. The identities are anonymous and hence the irreversibility risk is extreme.
Unregulated: Cryptocurrency is not backed by any financial institutions or government, unlike financial markets which are relatively safer as they’re been backed by a regulating authority that constantly strives for investor safety and interest.
Highly susceptible to hacking and cyber frauds: The increasing popularity of cryptocurrency has also drawn the attention of many hackers and scamsters. Though crypto is strongly encrypted, it is still vulnerable to hackers looking for opportunities to commit frauds which one can avoid with the help of cryptocurrency risk management.
How can you mitigate the risk?
Research important crypto coins: Before investing in any cryptocurrency makes sure you research it and invest as per your capacity. Investing just because you’re feeling left out or without consulting any investment advisor isn’t advisable.
Understand your reward/risk ratio: Reward to risk ratio is how much you stand to profit for every unit of currency you risk. Invest only that much which you are ready to risk.
Diversify your portfolio: Investing in many crypto coins can help to minimize the risk factors. A diversified portfolio minimizes the risk associated with the portfolio. Since investment is made across different coins, the impact of volatility can be combated. Some coins are extremely fluctuating while some are not.
Define your entry-exit strategies: Your entries and exits are an essential part of your trades. A great entry is the icing on the cake of a profitable trade, while with the exits, you are not just considering gains, but also losses. Planning your exit points is a crucial part of a solid risk management strategy.
Crypto has its pros and cons that one should consider before trying to trade or invest in it. For example, on one hand, crypto provides absolute secrecy and privacy which is great but on the other hand, the same privacy can hamper fraud detection and scams. So, choose wisely
Everything comes with its risks and perks. One should not blindly follow the trend, rather do his/her research and then pick what’s best suited for them. When investing, look into various techniques of risk management in crypto trading to avoid any mishaps in the future. At this stage, it’s highly uncertain and volatile that can either make you filthy rich or a pauper!
Reference:
https://www.cmcmarkets.com/en/learn-cryptocurrencies/what-are-the-risks
https://www.forbes.com/sites/dantedisparte/2018/07/21/beware-of-crypto-risks-10-risks-to-watch/?sh=cbe648b5f17f
https://www.google.com/amp/s/www.forbes.com/sites/forbesfinancecouncil/2018/12/05/the-top-10-risks-of-bitcoin-investing-and-how-to-avoid-them/amp/
https://www.google.com/amp/s/www.entrepreneur.com/amphtml/373548
https://www.google.com/amp/s/blog.liquid.com/how-to-identify-entry-and-exit-points-when-trading-crypto%3fhs_amp=true
Blog Published By: Priya Kamath, Student Risk Committee Member
