The risks of trading cryptocurrencies are mainly related to the volatility of the cryptocurrency market. Since they are high risk, it is important that you understand the risks before you start investing in cryptocurrencies. All financial assets come with high risk, whether due to leverage, unethical trading techniques, or market volatility. Here’s a list of the most common risks associated with investing in cryptocurrencies.
They are volatile: sudden changes in market sentiment can cause sudden and strong price swings. It is not uncommon for the value of cryptocurrencies to suddenly drop by hundreds or even thousands of dollars.
Unregulated: Cryptocurrencies are not currently regulated by governments or central banks. Recently, however, they have attracted some attention. For example, there are questions about whether they should be classified as commodities or virtual currencies.
The networks in which transactions take place are susceptible to hacking: there are no perfect ways to avoid disruption, human error or hacking.
Can be affected by hard forks or crashes: Cryptocurrency trading has additional risks, such as hard forks and crashes. You should familiarize yourself with these risks before trading these products. There can be quite a bit of price volatility in the case of hardforces, and we may suspend trading on these dates if we do not have reliable prices in the underlying market.
With CMC Markets, you can trade CFDs (Contracts for Difference) on Bitcoin and Etherium as underlying asset using a real or demo account. The risk exposure when trading CFDs is different from trading cryptocurrencies directly. You can benefit from small movements in financial assets and thus make a profit. However, no investment product can guarantee that there is no risk.
They are highly speculative products: To invest in CFDs, you only need to deposit a percentage of the total value of the trade to open a position. Profits and losses are based on the total value of the trade. The cryptocurrency market is highly volatile and when combined with collateralized trading can lead to significant losses.
They can be affected by market gaps: market volatility can cause prices to jump from one level to another, bypassing an intermediate level. Market gaps or slippages often occur during periods of high market volatility. Consequently, a stop loss order may be executed at a worse price than the one you specified. This can compound losses if the market goes against you.
Costs may be higher than other asset classes: You must look at all the costs of the trade before you open it. Costs may be higher when trading cryptocurrency CFDs. The likelihood of benefiting should be analyzed by considering the impact of costs.
Price fluctuations. Compared to currencies, the prices of cryptocurrencies used to value CFD positions can vary significantly.
For novice traders, we recommend opening a demo account to start trading cryptocurrencies. Because of the volatility of the market, particularly the risks of bitcoin trading, it is possible to trade virtual funds without as much risk as in a real account.
You should make sure you fully understand the risks associated with cryptocurrencies before you start trading. Invest only if you are an experienced investor and have a good understanding of financial markets. Investing in cryptocurrencies may not be suitable for all investors. We recommend that you seek independent advice, if you need it, before you start trading CFDs. In addition, it is recommended that you refer to our risk management guide for more information. The guide explains the world of stop-loss orders, the use of leverage and the appropriate margin rate.
The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht “BaFin”) regulates CFDs. This means that investment firms offering CFDs on cryptocurrencies must be authorized and supervised by BaFin. In Spain, affiliates of EU investment firms must be registered and supervised by the CNMV. Individual claims can be filed with the CNMV and BaFin. CMC Markets is also a member of the “Entschädigungseinrichtung der Wertpapierhandelsunternehmen” (EdW), a compensation plan for financial services companies that covers justified claims from retail clients up to €20,000 per person and company. However, these protections do not compensate you for trade losses.
Risks of investing in cryptocurrency
High Volatility : Although there are projects behind several cryptocurrencies, mostly Blockchain technology developments, their price is largely determined by supply and demand for them. This price adjustment is influenced by market sentiment during changes in the crypto ecosystem.
Whale movement: Those who have accumulated large amounts of any cryptocurrency are known as “whales” , it is important to take them into consideration as their movements, both buying and selling, affect the mood of the crypto market and can cause large fluctuations in cryptocurrency prices.
Lack of regulation . One must remember that, strictly speaking, these financial values are only for those who thus accept and recognize them as such. This is important because so far, cryptocurrencies are financial instruments not recognized by any government, and therefore they are not instruments regulated by any government or financial institution.
Liquidity: being speculative securities with such volatile prices, there is a risk that they will not have the necessary liquidity to handle the mass exodus of investors without affecting the price of these cryptocurrencies downward and in a short period of time.
Lack of recognition as a means of payment: this is due to the fact that cryptocurrencies do not meet the characteristics of fiat money, which are necessary for their use as a unit of account and means of savings. Lack of recognition by the government, constant change of its price and rejection by the masses are the factors that prevent cryptocurrencies from being speculative objects and turning into money in the strict sense of the word.
Exchanges, fraud and cyberattacks: Since cryptocurrencies are unregulated assets, their transactions require intermediaries, unfortunately, in many cases these “exchanges” may not be the most appropriate and may be a cover for fraud or have flaws in their cybersecurity systems that they will end up stealing all their users’ wallets.
Loss of keys: this is a problem that was discovered during the last bull episode of Bitcoin because, especially among those who have bought this cryptocurrency since its creation, realizing that it is suffering, they realized that they lost access to their wallets keys, so they lost the ability to claim their winnings.
Forks: roughly speaking, a fork refers to a change in the blockchain protocol used by the cryptocurrency. These changes can be hard or soft. The case with the greatest impact is that of a hardfork, because it involves such a change that the chain will be split in two, leading to the creation of another cryptocurrency, which will necessarily affect the price of the original coin.
These are the main risks to consider if you decide to invest in any cryptocurrency. The cryptocurrency market is new and immature, and the dangers are hidden and evolving, as are the benefits offered.
Of course, the cryptocurrency market is still in its infancy and offers great opportunities. As risks decrease, it will become an increasingly interesting asset to invest in.
It is necessary that users should be aware of the risks that exist when entering into transactions with such assets. At a minimum, they should be informed in a simple and clear manner on their website or the medium they use to provide their services of the following:
- Cryptocurrencies are not legal tender and are not backed by central banks.
- The inability to undo transactions made in cryptocurrencies after they have been executed
- Volatility in the value of cryptocurrencies
- Technological, cyber and fraud risks inherent in the use of cryptocurrencies