Cryptocurrencies are overgrowing. The start of 2021 shows this clearly. According to CoinMarketCap, the total market capitalization in the market for cryptocurrency surpassed $1.36 trillion on the 9th of June 2021. For example, in March 2020, market capitalization was only estimated to be 160 billion.
As the market continues to increase, many are unaware that crypto trading isn’t only about making money and risk but also about the risks. If you don’t want to be able to withdraw your funds on the very first day, you must be aware of the rules for risk management in your mind. A well-planned strategy can help you earn substantial profits and lower the possibility of losses.
When trading in cryptocurrency, the risks include losing money invested. Thus, risk management involves the ability to anticipate and limit the potential loss resulting in the event of a failed transaction.
Risk management to avoid the loss
Even skilled traders with an impressive record in reading the market could fail to make it through one or two poor trades if they don’t take proper precautions to manage risk or allow their feelings to take over. The lure of “hitting the jackpot” or following market sentiments can be too strong, leading traders to be skewed or too confident.
To limit the possibility of huge losses and permit traders to operate with a calm mind, the most fundamental trading tools and methods of risk management have to be employed at a minimum. They include establishing trading rules like limit orders, market orders, and stop-loss orders, which allow traders to minimize losses by activating an operation if certain conditions are fulfilled.
With these sorts of tools put in place, traders can unwind from the computer screen and trade confidently, limiting their losses and making profits within a certain amount. The limit determined will be based on the risk-taking capacity of the investor as well as how much capital they’re willing to risk on the trade.
The risk managers must tackle the fact that cryptocurrencies have different qualities and are not interchangeable. The array of cryptocurrency options differs across several dimensions, especially regarding security, the ability to be programmed, and governance aspects.
But, there is no “cheapest-to-deliver” cryptocurrency. When evaluating risk management, monitoring, and assessing, one should consider the different features of different cryptocurrencies.
BTC’s cryptocurrency that started it all is a straightforward structure. It is designed to transfer values, receive value and store it in a digital and cryptographic format, with functions similar to the operations of gold and money. The most frequently traded cryptocurrency exchange is KuCoin, which enhances the essential functions of BTC by incorporating more advanced self-executing ” smart contract” capabilities which can be utilized to digitally replicate complicated financial instruments such as transactions, performance contracts, and transactional. Furthermore, KCS is also used for making exchanges.
Trading costs and illiquidity
The cryptocurrency market is typically less liquid and more expensive than the traditional market. The supply of various cryptocurrencies is tightly controlled by releasing new units following a pre-determined timetable, so it should be no surprise that the extreme fluctuation of cryptocurrency prices results from liquidity.
The cryptocurrency market will likely struggle for a long time with low liquidity and high volatility, making effective price determination an ongoing issue. Gapping is also continuing to be an issue within these markets, which limits investors’ ability to get out of their cryptocurrency investments. In addition, it is becoming increasingly clear evidence of exchanges that routinely alter prices and deal with customers to front-run large-scale transactions.
Legal and regulatory legal issues
Contrary to financial instruments, cryptocurrencies are not subject to regulation and don’t benefit from the same legal security afforded to the financial instruments traded. This creates myriad legal risks and uncertainty that can significantly affect the investment ability and risk management for digital assets.
There is no consensus on the international level on the best way to regulate cryptocurrency, especially when it comes to policing design and development. It is not easy to determine the right policy for a government. And, at times, quite unstable. Certain nations have prohibited the production, selling, or trading of specific cryptocurrencies, while at the same time, they allow and encourage the expansion of others.
For some, this basic legal security provides an opportunity to evaluate the possibilities of cryptocurrency. However, for others, the absence of uniform regulations keeps the legal and compliance issues that stand in the way of the growth of these currencies.
Risk managers must be aware that transactions in various cryptocurrency markets could bring a range of complicated legal and compliance risks.