Financial risks in crypto trading

High volatility

Volatility is one of the main risks that crypto bears in it. Crypto prices can drop and rise by hundreds or even thousands of dollars within a very short time. 

You can mitigate it by diversifying your trading portfolio correctly. Then, your losses in one coin may be compensated by gains in another coin. For the correct portfolio diversification, check every coin you are buying to avoid useless tokens and scams. Here are the main rules to follow when selecting crypto assets to make your portfolio as resistant to volatility as possible.

• Choose market leaders
• Pick coins that have different use cases
• Pay attention to the native tokens of blockchain projects
• Invest in smaller tokens with a high growth potential. 

More details on selecting crypto assets for your portfolio you can find here. 

Lack of regulation or regulatory unclarity

The lack of regulation is another risk. Regulators are introducing changes to the existing legislation system to accommodate crypto constantly. But for now, even the leading markets that are loyal to crypto cannot boast of clear and transparent cryptocurrency regulation. 

There are not many things you can do here because the regulation doesn’t depend on individual traders. But we would advise avoiding shady assets - those that support projects with dubious value. Also, don’t forget to pick a reliable exchange for trading because if it fails or if a regulator freezes its accounts, it will be hard to get your funds back.

Error and Hacking

Blockchain and crypto technologies are still very immature. That’s why projects are constantly hacked, and funds are stolen. To prevent your funds from going to hackers, you’d better pick trading exchanges that provide some guarantees, ensure the funds of users, and with a proven track record of when users’ funds were reimbursed.

Never entrust your private keys or any financial information that may give access to your funds, such as passwords, to any third parties.

Never connect your wallet to a website you don’t know. Even if you provide a third party with access to your wallet, always double-check all the data before confirming any transaction. 

As a trader, you use specialized services (a social trading functionality, a smart trading terminal, trading bots, etc.) to benefit from price fluctuations. Pick trading services that guarantee the top safety level for your funds and personal information. Always check whether such services are audited by reputable third parties such as Hacken, etc. Make sure proper customer support is provided in case of an emergency or if you need to ask about a feature you don’t understand.

Asset discontinuation

While nobody can forecast that a specific asset may discontinue, you can limit your risks by researching the project. If the project is working on solving real-world problems, and if it has at least several use cases, most likely, the project won’t be discontinued. 

Another way to make sure the discontinuation risks are low is to have a look at the list of investors. If well-known venture capital funds are among them, the project has a chance to survive even the most difficult periods.

Bottom Line

Yes, crypto trading is a very risky activity, but by assessing the risks properly and managing them correctly, you can turn them into benefits.