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Different Cryptocurrency Risks to Be Aware Of In 2022



Different Cryptocurrency Risks to Be Aware Of In 2022

Photo by Kanchanara on Unsplash

Ranging from the potential for higher returns to the structure, there are many reasons why cryptocurrency has gained popularity.

According to research, more than 14 million people are signed up on Coinbase. Even more, there are currently 23 people trading cryptocurrency, not to mention, the millions of others who have put their investments on hold for long-term profits. While it’s evident that cryptocurrency provides great benefits, it’s not all roses because there are some risks that new investors and trader should be aware of!

High Volatility

Volatility remains one of the most critical factors of the crypto market, which is defined as the sudden change or shift in the market’s sentiments that lead to immediate price movement.

However, we cannot say that volatility is only in the crypto world because other financial sectors, such as the stock market, are also vulnerable to volatility.

On the other hand, we need to understand that the spread and intensity of volatility will be higher in the crypto world. Also, there are various reasons behind the higher volatility of this industry, including the weird schematics.

Absence Of Regulations

As much as everyone despises the regulations, they provide ultimate protection to the investors by protecting their money in case of mishaps.

Coming back to the main point, the legal aspect of cryptocurrencies changes in 2021, with every nation wondering if they should regulate the crypto assets or not.

Similarly, there was various fake news and speculations on the industry, which resulted in a market plunge, but the government managed to hold down the horses.

When it comes down to cryptocurrency, there are various legal premises associated with the regulatory agencies, which have the capacity of determining the cryptocurrency’s future.

On the contrary, the cryptocurrency regulators are justly concerned about the terrorist groups and criminals using different cryptocurrencies. Still, some regulators are in favor of a cooperating regulatory stance, which advocates awareness.

To summarize, it’s needless to say that properly designed regulations are great for investors and monetary protection while reducing risks in the long-term timespan.

Market Risks

The cryptocurrency assets are vulnerable to risks that can be caused through the market movement, just like other financial marketing. For the most, there are two types of risks associated with the market, including unsystematic risks and systematic risks.

The systematic risk is always there because of the inherent characteristics of the crypto markets. On the other hand, unsystematic risks are associated with one crypto asset, which has the capacity of changing the fundamentals.

Tax Risks

When it comes down to cryptocurrency, there is evident uncertainty associated with the tax status, be it on returns or investments. In some countries, Bitcoin is classified as an asset, but it largely depends on the jurisdiction of the country. For instance, Bitcoin has been labeled a legal tender in El Salvador.

On the other hand, trading cryptocurrencies has been legalized in Canada and the U.S. Still, there are countries like Russia and China that have to forbid the trading practices.

With the imposition of the tax, we need to remember that there will be sales taxes or value-added taxes. So, depending on your location, it is suggested that you ask for tax advice.

Cybersecurity Risks

Cryptocurrency is the dawn of a new era of digitalization, but cybercrime is also gaining traction. It doesn’t need any saying, but cryptocurrencies are decentralized, which means the cyber protection and hygiene of the crypto holders is the ultimate priority as there are drawbacks of blockchain technology.

Also, with each passing day, ransomware attacks and unusual absences are becoming most common in the cryptocurrency environment and are complicated, but the common targets are beginners. So, before you make your way into the crypto world, make sure you are fully encrypted.

Tips To Mitigate These Risks

  • Always conduct your research and only invest what you can afford to lose
  • Make sure to study the reward/risk ratio (if you ask us, 1:15 ratio is most suitable)
  • Make sure to diversify your portfolio rather than putting all your eggs in one basket
  • Always have the exit and entrance strategies in mind

The Bottom Line

The bottom line is that cryptocurrency is one of the most value-oriented markets out there, but you need to remember that it has a fair share of risks, just like other financial markets, and stay atop the risk mitigation!

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