Everyone is aware that trading cryptocurrencies pose a high risk but are you aware of the different reasons why cryptos are volatile? Find what makes investing in volatile cryptos dangerous, and check out the top Crypto Risks Factors in 2022!
Why Virtual Assets Trading Carries Crypto Risks?
It’s a global truth that trading or investing in volatile cryptos comes with risks that can also cause legal consequences. But, what makes the Crypto Market Volatile that has led to nations banning cryptos altogether?
Are the crypto risks mostly ‘hearsay’ which is also known to affect the stock market and the global forex trade?
→ Not quite!
The global crypto market is ruled by several factors whose individual connections may have nothing to do with cryptos. At the same time, certain other activities contribute towards adding to the existing crypto volatility. Each of them plays an active role in making crypto trading risky. Hence, never indulge in ape trading without learning the reasons mentioned below.
7 Top Crypto Risks Reasons Why Cryptos are Volatile!
Here are the reasons why you should take crypto risks seriously before investing in crypto trading activities. By learning to recognize them, you can make informed decisions that can help you diversify your crypto investment portfolio.
1. Ongoing Development + Decentralized
The number one reason that allegedly presents cryptos as volatile is their age.
Cryptos are pretty new compared to the financial markets of fiat currencies and stable assets like silver, gold, and oil. Today’s crypto market barely makes up for a $2 Trillion valuation. Comparatively, the gold market and the US Stock market have higher valuations exceeding $7.9 trillion and $28 trillion, respectively.
But, the ongoing development of the crypto infrastructure and technology and its adoption can help raise its valuation. While this is positive, cryptos are decentralized and not governed by any nation in particular.
Take, for example, the announcement of the TON blockchain platform featuring Gram coins by Telegram. The popular multi-messaging app has long announced its release, but the blockchain is still pending its official release.
2. Purely Virtual Assets
While most fiat currencies have their worth linked to the gold reserves of their respective nation, major cryptos don’t. Arguably, one may believe that stablecoins linked to a real asset like the USD currency may be safe, but the LUNA market crash is a testament to crypto volatility at its worst.
Similarly, the other crypto assets on the global market are mostly virtual. NFTs, GameFi services, DeFi protocols, etc., allow users to own or trade crypto assets, but in reality, they are only limited to the Virtual world.
The existence of Metaverse is proof that cryptocurrencies can be beneficial to own but could only exist in the digital world. Assets like fiat money and gold, on the other hand, are tangible assets that anyone can carry or exchange without involving digital modes of exchange.
3. Lesser Cross-Blockchain Transactions
The existence of multiple different blockchains serves to offer choices for early investors in the crypto market. However, the lack of availability of making cross-blockchain transactions add to the crypto risks that deter some professional investors.
A crypto owner must rely on crypto exchange services to use their crypto for purchasing assets available on alternative blockchains.
A real-world example of the lack of cross-blockchain transactions is the missing facility between the Ethereum and Binance blockchains. Sure, investors can use the P2P exchange methods to convert cryptos, but cryptocurrencies should be inter-exchangeable as virtual assets. Such operations can help cryptos become the Reserve Currency by replacing the USD.
4. Crypto Whales
A Crypto Whale is an entity possessing a grand reserve of specific crypto assets whose trade actions can dictate crypto prices.
It is speculated that Satoshi Nakamoto and Elon Musk are Crypto Whales secretly owning Crypto Assets worth billions!
While millionaires and billionaires already exist globally, possessing trillions worth of assets collectively, their trade actions are still subjected to regional jurisdictions. But, in the crypto world, such crypto owners are answerable to none because cryptos are decentralized.
A perfect real-world example of volatile cryptos is the rise of the DOGE coins alongside the GameStop stocks. A handful of crypto whales successfully raised the worth of DOGE crypto coins to over $46 in May 2021. Two months later, their value dipped over 70%, which continues to fluctuate vastly during different periods.
5. Crypto Exchange Commissions
Another unsurprising factor contributing to active crypto volatility is the commission charged by the global crypto exchange platforms. While this is a concerning matter, evading it entirely is next to impossible unless the P2P exchange grows. But, creating a vast P2P exchange network is only possible with mass crypto adoption.
Since it is unlikely that cryptos will overtake fiat currencies anytime soon, having an active P2P exchange network is doubtful, even with the existence of DAOs. Hence, crypto exchange platforms can dictate their commission fees, which is inevitable but not always harmful.
The drawbacks of a P2P mode of crypto exchanges are fraud and theft, which one can avoid by using a decentralized crypto exchange platform. Yet, depending on the regional judiciary norms of operating crypto businesses, these exchange platforms may be incited to charge higher commissions in specific countries.
6. Crypto Mining & Adoption
Crypto risks brought on the environment by crypto mining operations are a global concern, which has led to multiple countries banning them.
It was learnt that some crypto farms in the US utilized energy resources in a week, equivalent to what the entire Sweden could consume within a year!
Such statistics are gravely concerning because the act of crypto mining does both; it uses high energy resources and emits enormous amounts of heat. The released CO2 in the environment from crypto mining to date may have already accelerated an irreversible climate change.
Amidst such reasons to oppose cryptos, some countries have made it legal to use and mine crypto. In contrast, several other nations have severely penalized engaging in crypto mining activities. Therefore, owning cryptos in such a polarized environment is nothing short of the crypto risks you can encounter depending on where you live.
7. Market Sentiment
The incident of the LUNA market crash or the February 2022 Crypto Crash are proofs that crypto volatility can be catalyzed.
It is rumored that the LUNA crash was caused by an unknown entity withdrawing $1 Billion worth of LUNA tokens.
The stablecoin algorithm then kicked in to create more coins to balance the crypto reserves, whose increased market volume led LUNA owners to withdraw them, worrying over growing crypto volatility.
Similarly, the views or actions of certain crypto holders or organizations can diverge the market trend at any second, making them highly volatile to own.
While the crypto risks may remain as it is for several years within the decade, the volatile cryptos may potentially also get replaced with newer tokens.
While this is another factor making crypto ownership and crypto trade risky, the ongoing decade is undoubtedly a Crypto Decade, based on how quick Web3 technologies are growing and increasingly getting adopted in various business sectors.