The world of investments may seem daunting to some, and cryptocurrencies are an even more intimidating field to the average investor. Mainstream investments like stocks are known for having periods of fluctuations, and cryptocurrencies are no different.
It is important to acknowledge the fact that every investment has its own pros, cons, and risks associated with it, each to varying levels. It is impossible for an investment to be without risk because then it would be impossible to determine an asset’s value.
Risk will always remain as a part of the financial market. And because it is part of human nature to experience fear and sometimes greed, risk cannot be permanently eliminated. The next best course of action is to take steps to mitigate the amount of risks to an acceptable level.
Cryptocurrencies are highly volatile by nature. To date, it stands to be the most speculative asset to ever come out into the financial world. A lot of big names in the financial world have criticised cryptocurrencies and declared them not worthy of investing in. Governments all over the world have also tried to place restrictions on cryptocurrencies because they are highly unstable.
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To help you gauge your risk tolerance as an investor interested in joining the cryptocurrency market, you need to understand that there is a broad spectrum of risks associated with the market. Here are some of them:
It definitely took a while for governments to warm up to the idea of cryptocurrencies. The growth of the cryptocurrency market seemed to be so sudden that governments have been caught by surprise. The situation is currently changing, though, with governments around the world starting to take a more definitive approach to regulate the crypto market.
Bitcoin, the largest cryptocurrency, had reached a high of $20,000 in 2017 before countries like South Korea and China started imposing bans on the cryptocurrency. Then came the year after, and European countries were suddenly putting the spotlight on Bitcoin. Eventually, the European Union was passing resolutions for the regulation of cryptocurrencies.
Cybercrime and Digital Theft
Cryptocurrency exchanges and digital wallets are often susceptible to data breaches and theft. There have been reported cases of high-profile crypto hacks that have had devastating effects on the market and its investors. Some investors lost their deposits, and others who have taken out loans in order to invest (which is a very bad idea!) have lost it all in the blink of an eye. This risk continues to be present in the cryptocurrency market.
Whale is a term used for individual or institutional investors who have a lot of pull and are able to dictate market trends based on their activities alone. With every movie they make, they can cause a rise or a crash in coin prices. And even if the blockchain technology behind crypto makes it decentralised, there is still a great deal of monopolisation in the market. Some big players have even been known to cause changes in the market for their own benefit.
Now, what about your risk tolerance level?
Your risk tolerance refers to the amount or degree of risk that you are comfortable with as an investor. Because the market is filled with speculation, which in turn causes volatility, it is important to determine your risk tolerance in order to come up with a viable way to get into cryptocurrencies. You will need it in a market where the value of a coin can easily be cut in half, only for it to rise higher than what it originally was in just a day. You could also lose your private key, leaving you with no way to access your investments. There is also the risk of hackers trying to steal your investment.
To determine your risk tolerance, you first need to know the exact amount of money that you are comfortable with losing. The amount should not be a percentage of your total investment portfolio but a total monetary value.
Understanding your risk tolerance can help you keep a level head to make rational decisions whenever the cryptocurrency market experiences heavy volatility. Unlike the mainstream financial market, you are subject to price fluctuations and threats of hacking and other cybercrimes.
In conclusion, your overall risk tolerance for cryptocurrencies boils down to how much you are willing to lose. And with every investment, you are making it with the knowledge that it can disappear within the blink of an eye. There are certain steps you can take to mitigate risk, but the reality is that every investment into cryptocurrency runs the risk of vanishing without warning.