Cryptocurrencies are a digital representation of value that functions as a medium of exchange. These assets can be traded just like any other financial instrument. Cryptocurrency trading is extremely risky and leverage hungry. A small price movement in one direction or the other can lead to huge losses in a very short period.
That is why it is important to trade with caution, understand the market and use risk management strategies to minimize the risk of loss. Cryptocurrency trading doesn’t require much technical knowledge; however, there are several risk management strategies that anyone trading cryptocurrency should be aware of. This article explains the different types of risk and how you can minimize them in your trading strategy.
Insider Trading Risk
It is often said that someone must have tipped off the traders to manipulate the market. Well, it is not uncommon for traders to find out about new news that can cause a big movement in the price of a particular asset.
If you are trading on an exchange that has a high volume of trading, it is quite possible that some of the people trading there are knowing about the new developments. If that is the case, it is possible that they are using the information to their advantage to manipulate the market. This is insider trading risk and you must be careful when trading on any exchange that has a high volume of trading.
If you are trading a small amount of cryptocurrency, there is no risk of being caught in insider trading. But if you are trading large amounts, it is possible that the exchange will find out about it and penalize you. The best way to minimize this risk is to only trade a small amount of cryptocurrency at a time and ensure that your trading is done on a decentralized exchange like a peer-to-peer trading platform.
Related: Strategies to be known before starting crypto trading for newbies
Market Outside Trade Risk
Some people think that since they are trading on an exchange, they are protected from the market outside risk. But, the big risk is that the cryptocurrency market is an extremely volatile market and price swings can happen at any time. Some of the reasons for this volatility are the increasing interest in the market and new investors entering the market to take advantage of the price hike.
There are two types of the market outside risk: – Inter-Exchange Risk: This is the risk of your trading losing money due to an exchange bankruptcy or collapse. Usually, the people trading on an exchange are the ones that are least protected from this risk. Any exchange a person uses is at the risk of getting hacked or bankrupt because hackers can easily get hold of that person’s account information. If a large amount of cryptocurrency is traded on an exchange, it can cause a lot of damage to the exchange.
So, the exchange owner can pull the plug and close the exchange, leaving everyone’s account in a mess. – Inter-Asset Risk: This is the risk that the price of one cryptocurrency can fall due to a rise in the price of another cryptocurrency.
For example, if a person wants to buy Bitcoin but the price of Bitcoin is rising fast, he or she will end up buying more Bitcoin than is desired. The same thing will happen if the person wants to sell Bitcoin. The market can decide that the person wants to sell Bitcoin and sets the price lower.
The person will again buy more Bitcoin because it is the preferred payment method. This can cause a loss in your trading. So, it is important to choose the correct cryptocurrency to trade.
Liquidity Risk
One risk of trading cryptocurrency is liquidity risk. In an extremely volatile market like this, one wrong move and the price of an asset can shoot up or fall, leaving you with no chance of getting out of that trade. However, if you are trading on a large exchange, you will have a higher chance of getting liquidated.
An exchange with low liquidity can get disrupted by the exchange getting hacked or the exchange owner closing the exchange due to low trade volume. So, the best way to minimize this risk is to only trade on a decentralized exchange like a peer-to-peer trading platform.
Zero-Degree Trading Risk
One of the biggest risks of trading cryptocurrency is zero-degree trading. What happens is that you place a trade based on an assumption that some event will cause a price movement. You may come up with an idea about what will happen due to some news or some event that is expected to cause a price movement.
All that is required to make that trade a failure is for that event or news to not take place. Then, you are left with a trade that was based on an assumption that did not come true. That is a huge amount of risk because there is no way to know for certain that that trade would have worked. So, it is important to only trade on a strategy that is based on some form of technical analysis.
Summing up
When trading on cryptocurrency bitalpha ai, there are several ways you can lose your entire trading portfolio. Here are the top 3 ways you can lose money while trading cryptocurrency: – Insider Trading Risk: This is when someone in the market knows about the new information and uses it to their advantage to manipulate the price of an asset.
This can happen on high-volume exchanges where large amounts of trading happen. – Market Outside Trade Risk: This is when the price of an asset changes outside the market and the market does not have any information about that change. – Liquidity Risk: This is the risk of losing money due to the low liquidity of the asset being traded. The best way to minimize these risks is to only trade a small amount of cryptocurrency at a time and use a decentralized exchange to trade.
