If every investment vehicle that is available in the market would be written, then the section consisting of the digital currencies would be the most interesting because it is one of the most volatile investments in the investment sector currently. Trading cryptocurrencies incur huge risks. This article will give you an insight into the risks for crypto traders that is an integral part of crypto trading.
The crypto traders face a bundle of emotions for the whole day fighting for profit. And even though it has been proven that the crypto space is a highly profitable industry, its volatility makes it a difficult market at times. People should take care of cryptocurrency risk management to stay away from getting huge losses.
There are many cryptocurrency risk factors that bring in risks for the crypto traders, which need to be evaluated with precision. There are many cryptocurrency risks and benefits, but in this article, we will only discuss the benefits. Cryptos, when used as an investment option, are highly risky and speculative, and it is crucial for all crypto players to understand the market before they start investing. Let us have a look at the high risk in cryptocurrency 2021 analysis.
It is a term that is commonly used in the digital currency space. It refers to the investors who can easily control the market due to the large number of assets that they acquire. Most cryptocurrency traders try to dodge through the markets where there are whales. Now you may wonder, what are they scared of? As in the oceans where whales, which are generally the biggest fish, eat the small fishes, a similar situation arises in the crypto space. The big investors try to increase their holdings constantly by taking privileges from the retail investors. Some techniques are being used by the big investors to cut the small traders in the market. This can be thought of as a cryptocurrency disadvantage. They are as follows:
Stop-loss hunting: This comprises of whales pulling down the price, for instance, below a support where many traders probably set up a stop-loss order, for triggering all those stop losses. After the trigger of the sale, orders have been done, the whales will return and purchase them at a cheaper price.
Spoofing: This is varied, it relates to setting a huge order in the purchase or sell-side to alter the retail trader’s expectation. In this way, they assume that they have spotted a whale in the industry and wish to be on the same side, setting orders only in front of that one. But just before the trigger for the whale order takes place, it is removed from the books of order, which implies that the small traders are being taken advantage of.
The digital currency market is very new compared to other markets like the stock, forex, or commodities. The very first and the main coin, Bitcoin, is just 10 years old. However, other than that, most of the cryptos now have 3 to 5 years of existence.
In cryptocurrency risk analysis, this lack of maturity for many pairs results in insufficient volume in less popular and capitalized pairs. And since volume is the main thing that is required for the movement of price and its fluctuations, it makes it tough to trade. So this poses risks for crypto traders.
Extremely unlawful in regulated markets, this form of “trader” has received a gold mine in the digital currency market. It is another technique to manipulate the market that contains unnaturally pumping and then dumping the value of a coin to profit from the raises.
These pumps are not created by just one investor, these are created by huge pump and dump groups, where investors give consent to purchase one specific low volumed crypto at the same time. These groups can raise the price of a coin even up to 500% in special cases.
The size of these pump and dump groups is, at times, huge. Presently, the biggest pump and dump group is estimated to have over 80,000 members, a number that the retail trader should be informed of if they don’t want to get caught by the dumps.
While in every single prevailing market all the data that can affect the actions of the prices and improvements of the sector must be public, the crypto space, again, is a bit different.
Since it is not a controlled space, players with exclusive data, or who are commonly known as insider traders, can take advantage of their authoritative position to highly benefit from that situation.
Common examples may include people working in big exchanges. Whenever crypto exchanges like Coinbase or Binance add a new digital currency to their platform, its value touches the sky. It can easily get a four-fold rise, and the people operating at these firms have information about it, which changes the value of the crypto even before the announcement is made.
Digital currencies are still a very young development in technology. Given the specific nature for which they remain between a currency and an asset, it is quite difficult for the authority to structure them in any existent law. Therefore, they are required to figure out which character they are going to have in their economies.
Since such a key dimension like the rules of the game are not stated yet, once they will be executed, it could affect the charts seamlessly. Up to a certain point where they can cause a shake in them if this comes out to be very restrictive in nature.
The Bottom Line
At times the crypto traders use technical analysis to look at the opportunities that are there at the entry and exit, however, the market of digital currency is characterized by other factors that should be considered. These 5 factors that have been stated above are the real risks for crypto traders that they should keep in mind while doing cryptocurrency trading.