Assessing The Risk Of Cryptocurrencies
Aug 20, 2021
Before you start trading crypto, it is important to understand that crypto-trading carries significant risk. Losses often exceed profits, as cryptocurrencies are highly volatile and speculative. Let’s examine the risk-profile of crypto-trading more closely, before hopping on an exchange.
Cryptocurrencies are mostly unregulated - Throughout the world, cryptocurrencies are largely unregulated. This means that when exchanging cryptocurrency, you are not guaranteed any protection and you will not benefit from any recourse which is available to customers receiving regulated services. However, even if cryptocurrencies themselves may not be regulated, many of the exchanges are - especially MEX Digital, where you can rest assured your assets are in safe custody with a highly compliant and regulated exchange.
Cryptocurrencies are highly volatile - The crypto market is extremely young and highly speculative. The price of a crypto can, at any given time, rapidly increase or decrease for any reason. Furthermore, unlike fiat currencies which are backed by governments or other legal entities, there is no central authority which ‘protects’ the value of cryptocurrency in a crisis. The risk of loss in trading or holding interest in crypto can be substantial, so you should never risk more than you are prepared to lose.
Cryptocurrencies are targeted by cyber attacks - Cryptocurrency users are frequently targeted by hackers and malware. If a hacker were to gain access to your private key, they would be able to transfer your crypto to another wallet. This would be a big problem as all crypto transactions are permanent and irreversible.
Risk tolerance level
In this context, your crypto-risk tolerance level refers to the amount of money you are able and willing to lose in the crypto market. This amount usually refers to the monetary value of your crypto portfolio, rather than a percentage of your total investment. Before starting to trade crypto, you need to consider the monetary value that you would be comfortable to lose in the crypto market. Knowing your crypto-risk tolerance level is vital when trying to create investment strategies for the crypto market.
In traditional markets, most traders will argue that one cannot ‘lose’ unless he/she sells his/her asset, because the market will ‘recover eventually’. However, this is not necessarily true of the cryptocurrency market, as it involves risks besides price crashes and volatility. These include losing crypto holdings to hackers/ cybercriminals or of a chosen crypto permanently losing all value.
Low risk vs high risk
When it comes to cryptocurrencies, is there even such a thing as low risk? Well.. not really, but that doesn’t mean we can’t minimize our risk:
In the traditional finance universe, there’s a strategy called the 2% rule. This rule explains that a trader should never risk more than 2% of their account size on a single trade. In the crypto universe, this strategy has also been adopted– however, because of the volatile nature of the crypto market, this advised percentage has been reduced to 1%.
Therefore, in order to reduce risks while trading crypto, you should never risk more than 1% of your account on a single trade. If your stop-loss is hit, you will only lose 1% of the value in your account.
Remember, proper diligence and sound judgement should be used in evaluating the risks associated with these activities. Trading cryptocurrency carries significant risk and losses can exceed deposits. Refer to our Terms and Conditions and disclosure material.