What are the Risks of Cryptocurrencies?
Cryptocurrencies are the most fashionable product. Appeared in 2008 with the hand of Bitcoin with Satoshi Nakamoto, they have managed to carve a niche within the digital wallets. Trading with cryptocurrencies is also another of the options available to you. Now, are they reliable, what are the risks of trading cryptocurrencies?
Trading cryptocurrencies has a high risk, but the same risk as trading any other security or currency. Lack of knowledge or executing risky trades are just 2 of them. But when talking about cryptocurrencies, other types of risks are also implicit. The most prominent are volatility, lack of regulation and theft or scams involving these virtual currencies.
Volatility is something implicit in a general way to cryptocurrencies. If you already trade with them you will have been able to see the huge oscillations to which they are subjected. These are due to supply and demand, as well as speculation. If you invest in cryptocurrencies you have to take into account that you can find yourself with high profits and losses.
But volatility is where the spark of cryptocurrencies lies and what allows the possibility of making money. As long as you comply with the premise of not investing capital whose loss poses a risk to your economy. A small investment in cryptocurrencies can bring you some joy. In the case of extreme volatility that takes you with a “changed step”, you will not be taking too much risk.
This should also allow you to diversify your portfolio. A trader never “puts all his eggs in one basket”, but has his investments in different securities.
The lack of regulation of virtual currencies
The magic of cryptocurrencies also lies in the fundamental fact that they are not subject to any government. This free spirit is what allows cryptocurrencies to be associated with the concept of globality. But it should also help you to be clear about one thing: this lack of government backing means that investors do not trust cryptocurrencies as much as standardized currencies.
The European Union is already working on a regulation to provide a legal framework for the digital currency market. The lack of regulation implies that volatility is high and that there are doubts on the part of investors. Regulating in this sense perhaps makes the magic of cryptocurrencies dissipate somewhat, but it is probably a necessary measure in order to give them consistency and avoid the most common problems associated with them.
Theft and scams
Cryptocurrency thefts, in addition to scams, tend to be highly publicized. Firstly, because they usually involve a large amount of money, and secondly, because anything that happens virtually always attracts attention. Many customers have lost their wallets due to security flaws or because they have been duped by fraudsters who, under false promises of high returns, have ended up emptying their cryptocurrency wallets.
To the usual security measures we take in our digital universe, we must add that it is always better and safer to trust in recognized exchanges than in others that promise what they cannot deliver. Be careful with what you receive by email, as phishing is one of the gateways for a Trojan to get hold of your wallet and empty it. Worst of all, in most cases, these crimes go unpunished.
To avoid the risks associated with investments involving cryptocurrencies, we need to approach the issue of security from a holistic perspective. Not only to avoid situations such as those described in the previous section, but so that you can make your experience with cryptocurrencies worthwhile.
What is technical and fundamental analysis in trading for?
They are ways of making investments and they approach them from a different perspective. One is not better than the other and they can complement each other and both seek the same thing, to generate valid predictions that allow us to obtain profitability. Technical analysis studies the movements of the present, of today, to predict those of tomorrow. Its investment horizon is always short.
On the other hand, fundamental analysis is based on the law of supply and demand of an asset, in this case cryptocurrencies. It has a more long-term horizon.
Having an understanding of how these securities work, as well as how attractive cryptocurrencies are to the public, can be a good tool for making a profit. As we have said, in the case of virtual currencies, volatility can be extreme. The case of the crypto LUNA is notorious, it lost 95% of its value in 10 days.
What is the purpose of studying price and volume?
The concept of volume tells us what is being demanded and in what quantity, and the price is its quotation at a given moment. Studying these parameters in the case of cryptocurrencies can help you to improve your investment strategy and reduce risks.
Generally speaking, when the price falls and the trading volume is high, there is interest in selling. Therefore, the price will continue to fall. But when the price falls and trading volume is also small, the market shows its strongest side. This is because investors wait for the price to rise again before selling. However, when the price rises and trading volume is small, the market becomes weak. Investors do not trust a rise and do not buy.
Investing involves keeping a cool head and putting emotions aside, or at least knowing how to manage them. Impulsivity is never a good companion when it comes to trading, and with cryptocurrencies even less so. Moving by rationality and not by pressure always gives good results and is one of the compulsory subjects in the school of life that is investing with cryptocurrencies.
Indeed, cryptocurrencies are not risk-free, but that does not mean you should leave them aside. They are a good instrument with which to trade and their future may be more than promising, especially if the long-awaited regulation that allows smoothing the most negative aspects they have takes place.
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