10 Crypto-related Financial Risks You Should Know
Do You Speak Crypto: Episode 5
Welcome to our “Do You Speak Crypto” series!
At DIFX, we’re constantly looking for ways to raise awareness and improve knowledge within the crypto industry to lower the barriers to entry and drive mass adoption. Therefore, we’ve prepared a series of articles for you in which we’ll discuss common terms in different sections of the blockchain and crypto industry together.
Episode 5: Crypto-related Financial Risks
Financial markets go hand in hand with financial risks. It’s almost impossible to seek profits without exposing ourselves to some level of risk. But when it comes to cryptocurrencies, everything increases significantly: the profits, as well as the risks.
You’re probably familiar with some of the crypto-related financial risks already: price volatility, ICO frauds, or thefts. All of these are considered financial risks and fall under a specific category. Let’s walk through some of the most common financial risks associated with the crypto industry together!
1. Volatility Risk
Volatility is probably the most recognized risk within the crypto space. Simply put, it refers to the sharp price movements of crypto assets within a short period of time. For instance, last year, Bitcoin experienced a 30% drop in just one day!
2. Liquidity Risk
For some cryptocurrencies with a small market cap, there may not be enough traders in the market. As a result, you can’t easily sell or buy coins at your desired price.
3. Counterparty Risk
Centralized cryptocurrency exchanges are the go-to place for most cryptocurrency users. They store your crypto assets in their storage and provide you with a user-friendly platform to buy, sell, and trade crypto assets.
As a user, you trust the exchange with your funds and believe they have the proper security measures in place to keep your assets safe. This trust comes with a cost: you may lose your assets to an exchange hack or internal fraud.
4. Regulatory Risk
Regulatory uncertainty is one of the major issues weighing on investors’ and businesses’ desire to join the crypto market. Cryptocurrency regulation varies greatly access different jurisdictions and countries as governments and regulators are still working to reach a clear framework.
As a result, crypto investors aren’t protected sufficiently in the markets while unexpected regulatory changes may cause them to suffer a significant loss.
5. Tax Risk
As if staying compliant with complicated and ever-changing tax laws weren’t difficult enough already, we have to witness the unclear crypto regulatory framework making it even worse.
Cryptocurrency trading and investment are subject to tax in many countries, like the United Kingdom, United States, Canada, and Germany, with every jurisdiction following its own rules and guidelines.
6. Asset Management Risk
Holding and managing crypto assets may be challenging and even cause irreversible consequences. By applying mathematical techniques, crypto assets provide you with a digital key to securely store and transfer your coins. Losing this key could result in the permanent loss of your crypto holdings.
Therefore, you should protect your keys with utmost care and have proper plans in place in case of any unfortunate events. Check out this article to find out how the DIFX Nomination Program helps you in this regard.
7. Credit Risk
There’s always a chance that the crypto asset you’re investing in would experience a sharp price decline, sometimes going straight to zero. The termination of a crypto exchange with all the users’ funds is also considered a credit risk.
8. Fraud Risk
The high profitability of cryptocurrencies has attracted many investors in recent years. Just last year, the investors’ fund reach a whopping number of $30 billion, which was more than the amount in all previous years combined. This makes the crypto world a dreamland for scammers.
To give you an example, in a Rug Pull scam, the scammers create a coin and start raising funds by selling it. They may even pump and promote their coin to make its value increase. After that, they’ll abandon the project by selling all their coins or disappearing with the investors’ funds.
9. Insurance Risk
Many crypto businesses offer little to no insurance against possible threats. However, as the industry matures, we can expect to see more improvements in insurance options for investors and traders.
10. Reputational Risk
Companies that opt to invest in the crypto market may face this risk. Any negative news relative to the crypto market may have a bad impact on the company’s reputation as well.
Didn’t find the terms you were looking for? No worries. Let us know in the comments so we can cover it for you in our next episode.
You can also join our DIFX Academy to learn more about trading strategies, financial markets, crypto and blockchain fundamentals, and much more!
DIFX is a CEX that uses blockchain technology to incorporate centralized finance. It is an easy-to-use platform for both new and experienced traders, establishments, and investors. As covered by Cointelegraph, BeInCrypto, and many other media outlets, DIFX allows users to nominate anyone from their family, friends, or loved ones and allows them to legitimize their claim upon the primary user’s demise.
Additionally, the company hopes to increase the use of digital currencies for direct settlement between beneficiary and payer by eliminating intermediaries. To begin your journey with Endless Possibilities, download the app now from the iOS or Google Play Store, or visit us at difx.com.