High-risk crypto trading assets significantly affect our lifestyles since they can alter our perception of money. Factors to consider are price volatility, cybersecurity, hedging properties, and the anonymity of cryptocurrencies. These components affect users’ behaviour and actions when trading cryptocurrencies. These factors can make cryptocurrencies an attractive asset for users to add to their portfolios. However, cryptocurrencies also pose serious risks that can cause damaging losses to Traders.

Cryptocurrency Price Volatility

Volatility refers to the measure of how much an asset price has moved over time. Cryptocurrency is considered a volatile asset because it has experienced steep rises and falls in prices. Crypto trading of Bitcoin with higher volumes has been shown to reduce some volatility, while lower volumes of crypto have higher volatility.  Despite the high risk, high return aspect of crypto trading is appealing to some investors, and cryptocurrency has been shown to have a similar effect on traders as stock market bubbles. Large downturns in the market can cause significant losses of money for traders, which can induce stress and panic in the same way that major busts did.

Hedging Properties

Cryptocurrencies can mitigate risk in the stock market. Despite the volatility risk of cryptocurrency, the asset has appealed to some traders as a hedging instrument against the stock market. Therefore, cryptocurrency can diversify traders’ portfolios. For instance, Bitcoin rallied in seven out of 60 months to the end of December 2020, whereas the S&P 500 declined for 17 of those months. 

Additionally, cryptocurrencies can hedge against inflation. Current inflation in the US is a function of rising federal budget deficits and increasing federal expenditures, which increases the money supply. The current debt crisis can slow economic growth. With rising inflation concerns, the “digital gold” of bitcoin and inflation-proof properties of other digital assets are attractive to crypto traders. Investors have the option to move their investments to crypto since it has better fiscal and monetary management. While other national currencies might face being debased, that is not the case for cryptocurrencies.

Cybersecurity

It is essential to consider the cybersecurity risks of crypto trading. Cryptocurrencies are not federally regulated, which means that they are open to widespread exploitation by criminals who want to scam crypto traders. Security breaches can result in the theft of users’ money, generating losses greater than bad trades. 

Crypto trading takes place on platforms like Binance, common targets for cybercriminals to hack exchanges or create fake platforms. Phishing is a common way for cybercriminals to lure users into revealing their credentials by copying legitimate trading platforms’ websites. To avoid the dangers of cryptocurrency malware and third-party applications, among other risks, it is crucial that crypto traders take proper precautions in their security practices and choosing platforms to use.

Crypto Trading and Anonymity

There is some controversy over the Anonymity of cryptocurrencies. The public transaction ledger tracks the entire history, which makes transactions transparent. 

On the other hand, there is no public tracking of transactions back to a specific crypto trader. Users and transactions are encrypted, and a crypto address does not reveal anything about a users’ identity. Users can also generate multiple addresses simultaneously to ensure that transactions are not linked to an owner. Additionally, only the trader himself can see how many bitcoins they have. This heightened user privacy is different from the privacy of a traditional currency system. However, this has led to an uptick in criminal activity since cybercriminals can remain anonymous while they hack into platforms. Finally, the risk with anonymity is that, if the address is linked to an identity, there is no more extended anonymity. 

The Bottom Line

As a relatively new digital asset, cryptocurrencies offer several pros and cons that traders should consider when developing their portfolios. The price volatility of cryptocurrencies can result in higher returns but also generate greater losses. Additionally, cryptocurrency has shown to be a hedging instrument against inflation and can diversify traders’ portfolios. On the downside, cryptocurrency is not federally regulated. As a result, it is prone to cybersecurity breaches and hackers. Lastly, user transactions are logged in Blockchain, making these transactions transparent. However, users’ identity is encrypted, making their identity anonymous. Crypto traders should be wary of the risks and rewards of crypto trading before they invest in the asset.