When trading with cryptocurrencies, you will always hear that this is a highly volatile asset and that there are many risks associated with it. Because of this, it is important to know exactly what these risks are, as it will help you know what to expect and can also help you create good risk management strategies.

Knowing these risks can help you anticipate potential challenges and prepare for them. Every successful trader who has made good profits from trading crypto has done so by knowing these risks and building their trading strategies around this knowledge. That’s why we will discuss potential risks associated with crypto trading and how to avoid them.

High Volatility

One of the biggest risks of crypto trading is how volatile these tokens can be. Cryptocurrencies can show daily price movements of 10% or more, and people will not be surprised. While high volatility means there is potential to make higher profits, it also means that you can take heavy losses. If you are trading with leverage, you will have a liquidation price, which is the price that the asset needs to reach before the broker thinks your position might be losing them money and closing it out automatically. Considering the high volatility of cryptocurrencies, there is a good chance that the price will move drastically, and the liquidation level will be hit before you realize what’s going on.

The best way to avoid falling victim to high volatility is to have a stop-loss order. A stop-loss order is an order type where you indicate a certain price of an asset, and if the price drops to that level, the order will automatically be closed. This way, you can limit the potential losses that you may suffer. When trading, you should calculate your risk tolerance and set a stop-loss order based on it. You can also set a take-profit order, which will close the order once the price rises and reaches a point indicated by you. This way, if the price had a short but sudden rise, you could capitalize on it without the risk of missing the profit from the spike.

Market Manipulation

When trading with cryptocurrencies and you suddenly see a market movement too good to believe, always approach it with caution. There are instances when big individuals, also called “whales,” manipulate the market and create artificial prices on which they can then make profits.

“Pump and dump” is one of the most common crypto trading risks to which you can fall victim. Big individuals invest in cheap cryptocurrency or even create their own during a pump and dump. They then create false signals and make people buy into this token, making the price jump quickly. When this happens, people see it as a good investment opportunity, and they buy in, which increases the price even further, making more people buy this crypto. This price increase might go on for a few minutes or days, depending on the scale of this pump and dump. Then, when these whales sell their cheaply bought cryptocurrencies, the price comes crashing and can even end up lower than it started in a matter of minutes.

To avoid falling victim to these types of market manipulations, always check why the price of an asset is growing so fast. If there are no good and confirmable reasons, then it is most likely a pump-and-dump, and it is best to avoid buying these cryptos. You can try to buy them and take advantage of this pump, but make sure that it is still in the early pump stage. Take out your profits fast or use stop-loss orders to avoid becoming a victim of the dump.

Scammers

It does not matter where you are; if there is money to be made, scammers will be just around the corner. Considering the anonymity that comes with cryptocurrencies, scammers have made this market their second home, and when trading with cryptocurrencies, you should always be on high alert.

You might encounter many different types of scammers and should be ready for all of them. Some fake crypto exchanges try to mimic other famous exchanges like Binance and Coinbase, or there can be fake exchanges offering really good bonuses and trading opportunities. When registering on one of these exchanges, the money you deposit might show up on your balance, but the problem here lies with withdrawing the profits you have made. When trying to withdraw from these fake exchanges, you will be met with texts such as “The network is busy; please try again later” or something along those lines. Sometimes, you might not even get this text, and pressing the withdrawal button will do nothing. This is just one type of crypto trading scam, and you can learn about other types of scams in our other articles.

Trading Strategy Fails

As we mentioned before, cryptocurrencies are highly volatile, and there is a possibility that the strategy you are trading with will stop working due to this volatility. Whenever you create a crypto trading strategy, you will need to analyze the market, learn how prices behave, and see when the best time to open and close a trade is, along with many other things that need to be considered. However, since cryptocurrencies are volatile, the market direction can change quickly, and if your strategy is not built with these market conditions in mind, you will suffer big losses.

When trading with a certain strategy suddenly stops working, you might not realize what is going on exactly. You might continue using this strategy, thinking it was a small miscalculation and it will be back to normal pretty soon. To avoid this risk, knowing exactly how your strategy works and what makes it work is important. Whenever you see that whatever made your strategy work is not there anymore, it is crucial to exit the market. It will be even better to have multiple strategies at your disposal, and whenever market conditions change, you change the strategy based on the current situation. There might be days when you will trade with 2-3 different strategies, which is complicated. Still, it is the safest and most profitable way to approach crypto trading, especially when the market is volatile.

FAQs on crypto trading risks

Is crypto riskier than stocks?

When trading with stocks, you are backed by the companies they are associated with. You know how these companies are performing, how much they are making, and more. Based on this, you can speculate on the price of each stock. However, cryptocurrencies are not backed by anything and are speculative assets, meaning price movements are based on people’s beliefs. This makes crypto a riskier asset to trade with than stocks, but it also gives crypto a better chance of making big profits or losses.

How to avoid crypto trading risks?

When trading with cryptocurrencies, you should analyze all the possible risks. Once you know the potential risks that might show up, you simply need to create risk management strategies for each scenario. Once you have a risk management strategy set up, you can then start to avoid these risks.