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

Different types of crypto trading and investment risks in 2022 and the effective mitigators
Written by publisher team

Cryptocurrency is gaining popularity among investors for various reasons, including its unique structure and potential for high returns.

According to Chainalysis, 15 million Indians are now trading cryptocurrency, and CoinSwitch Kuber has more than 14 million users registered on their platform alone. This puts India on par with the United States, where 23 million people are currently trading in cryptocurrency.

While most people are familiar with common currencies and assets, potential investors are not familiar with the wide range of assets available or how they work.

Before you invest, you should be aware of the volatile nature of many cryptocurrencies and potential security, legal, accounting and tax concerns. In the following sections, we will go through the potential risks of investing in cryptocurrencies and ways to manage the risks involved in cryptocurrency trading.

high volatility

Volatility is one of the factors that drive the cryptocurrency market. If you don’t know what volatility means, it’s the sudden shifts in market sentiment that can lead to large and rapid price movements.

Volatility is not something that is only concerned with the crypto market. It can be seen in other financial sectors, but its density and prevalence is higher in the cryptocurrency space. There are several reasons for the high volatility of the asset class in question, including its emerging schemes compared to other forms of investment.

But there are a few reliable and relevant methods of dealing with them like bosses. Let’s look at it in more detail later in the article.

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lack of systems
The legal position of cryptocurrencies took a turbulent journey in the country in 2021, with the ultimate question, “to regulate or not to regulate crypto assets.” While speculation and false news related to the matter sent the market down, the government ultimately chose to rein in the horses for the time being.

There are significant differences in the legal premise of cryptocurrencies between different regulatory agencies, which may determine the future of cryptocurrencies in India. On the other hand, regulators are concerned that criminals and terrorist groups may use Bitcoin and other cryptocurrencies. On the contrary, some regulators tend towards a more adaptive organizational viewpoint, advocating greater awareness and use cases of the underlying technologies.

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

market risk

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 risk and unsystematic risk. Systematic risks are present in all cryptocurrencies because they are inherent in the crypto markets. Unsystematic risks, specific to a single crypto asset, may involve a change in the company’s fundamentals.

Tax Concerns

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

For example, El Salvador has made Bitcoin legal tender. Whereas in countries like the United States and Canada, trading virtual currencies is legal. On the other hand, China and Russia banned trade practices.

Digital currency purchases and transactions, for example, may be subject to sales or value-added tax (VAT). Depending on where Tango is located, cryptocurrency investors may need to seek tax advice on a regular basis.

cyber risk

While cryptocurrency may be the dawn of a new era, it also has a lesser known counterpart: cybercrime. Since cryptocurrencies are completely decentralized, cleanliness and electronic safeguards for cryptocurrency holders are priority #1.

“Extraordinary disappearances” and ransomware attacks are complex and fast-moving threats in the crypto environment, and beginners in the crypto ecosystem often become a target. Therefore, before entering the world of crypto, it is essential that you are aware of these risks.

It is essential to understand the security measures taken by the exchanges you invest in and the guarantees that they publish. Also, platforms like CoinSwitch Kuber keep security as priority #1 and therefore have a strict mandatory Know Your Customer (KYC) procedure to ensure transparency and provide maximum security.

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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 only for cryptocurrencies but for all investments in general. Investing without research or diving into an investment pool without speaking with an investment professional is not recommended.

Understand the reward/risk ratio

The risk-reward ratio indicates how much money you will earn for each unit of currency you risk. Invest only as much as you are willing to lose. A ratio of 1: 1.5 is considered reasonable.

Diversify your portfolio

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

Determine entry and exit strategies

Entry and exit points for your trades are critical. The ideal entry is the cherry on top of a good deal, but you must weigh both gains and losses with exits. You should also plan your exit points as part of an effective risk management strategy.

Avoid excessive leverage

Traders usually use margin because it increases order size and allows them to buy or sell.

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

Choose quality over quantity

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

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

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

last thoughts

As with any new and innovative technology, the ecosystem surrounding cryptocurrencies is developing rapidly. If this investment sector appeals to you, you should be attracted to more than just the ups and downs. Before investing, it is necessary to understand how cryptocurrencies work, what their purpose is, and how the ecosystem around them works.

If you want to start your crypto journey today, download India’s leading cryptocurrency trading platform CoinSwitch Kuber and start investing keeping these factors in mind.

: The above content is not editorial, and TIL hereby disclaims any and all warranties, express or implied, relating thereto. TIL does not necessarily guarantee, endorse or endorse any of the above content, nor is it responsible for it in any way. This article does not constitute investment advice. Please take all necessary steps to ensure that the information and content provided is correct, updated and verified.


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