Risk Management in Cryptocurrency deals with the various forms of risks associated with Cryptocurrency transactions and the volatility of the digital currency markets. Considering the fact that cryptocurrency markets are the most volatile ones than any other related financial markets and hence the Risk Management in Cryptocurrency markets and its mitigation measures become all the more important.
The various types of Risks associated with the Cryptocurrency markets include:
Table of Contents
Risk Management in Cryptocurrency – Liquidity Risks
Liquidity risk is the risk that the market cannot support your transaction at the price you expect. Liquidity comes and goes, as with all markets. In Risk Management in Cryptocurrency, less popular coins are less liquid, meaning that a large buy or sell can move the market against you more than expected. With less popular coins or coins of regulatory uncertainty, there is also a risk that they are de-listed by exchanges, which reduces their liquidity.
Risk Management in Cryptocurrency – Exchange Risks
It is convenient to keep assets on exchanges because you don’t have to deal with private keys, and you can quickly trade between assets. However, exchanges have had an extremely poor track record of keeping customer assets secure. Nearly all exchanges have been hacked in the past. Michael Matthews published a list242 of a selection of cryptocurrency exchange hacks between 2012 and 2016:
Risk Management in Cryptocurrency – Wallet Risks
With wallets, there is a tradeoff between security and convenience. Wallets that run online on computers or smartphones are convenient because it is easy to make cryptocurrency payments. However, storing private keys on a device exposed to the internet is not advised. Some people keep a small amount of cryptocurrency on their phone wallet so they can make payments instantly, but the advice, again, is to keep only as much in them as you are willing to lose.
Risk Management in Cryptocurrency – Regulatory Risks
Regulation around cryptocurrencies and tokens is evolving. It is worth understanding as fully as possible the nature of the assets you are considering. ICOs are operating in a legal grey area in many jurisdictions, and there is a risk that some are deemed to have been illegally performing regulated activities. Depending on the jurisdiction and classification of crypto assets, and what you are doing with them, the tax also needs to be considered. You are not excused from complying with tax regulations just because the assets are recorded on blockchains!
Apart from these known risks related to the crypto markets, scams too occupy a large portion of the risks with respect to the transactions and the data of the traders or investors.
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