Market risks are risks that are directly related to cryptoassets. There are two types of market risk:
- Exchange Rate Changes and Volatility
The most obvious market risk is that the exchange rate is not in favor of the owner of the cryptoasset. For example, a user invests in Bitcoin or other cryptocurrencies and hopes for an increase in the rate. For some reason, growth does not occur, but stagnation or decline occurs. In this case, the user will incur losses when selling assets. However, prior to the sale, it is not known if the user will lose their funds as the drop in rate may just be another round of crypto economics or a storm to wait for.
Therefore, if an investor does not panic and in a downturn does not start selling cryptoassets, but waits for the rate to rise, he has a chance to make money. To look at this market situation, let’s take Bitcoin as an example. Its price is very unpredictable: it can fall sharply, but then fly up in a month, increasing the price by two, three or even five times. And vice versa: the rate can peak and fall sharply. Market participants do not control these moments in any way. They can only control their trading with competent investment strategies, or using analytical tools.
To protect against this type of risk, there is a special investment strategy Buy & Hold. This strategy consists of ignoring depreciation and constructing your investment portfolio in such a way as to achieve maximum asset diversification and, accordingly, long-term increase in overall investments.
To get results, an investor should quickly adapt to changes in the cryptocurrency market so as not to lose assets. As already mentioned, a characteristic feature of the cryptocurrency market is its volatility, which in most cases determines the degree of manifestation of this risk in practice.
Volatility is a sharp, short-term, abrupt change in rate. The risk of volatility is that when trying to get money (e.g. by selling cryptoassets), the rate is extremely unprofitable for the seller.
Volatility is one of the risky aspects of cryptocurrencies that reduces user trust in them. Volatility is hardly predictable: even experienced traders do not always cope with this task, as it is determined by many external and internal factors (e.g. news about cryptocurrency regulation at the state level, etc.). It is the volatility that makes cryptocurrencies a risky investment while creating conditions to generate much larger profits than traditional markets.
The volatility over a period of time or for the lifetime of a cryptocurrency is called historical volatility. Expected (or predicted) volatility is also expected, that is, assumptions about the degree of cryptocurrency price fluctuations in the future. It is also calculated based on the historical volatility and current position of the cryptocurrency in the market (value, liquidity, etc.).
To predict volatility, an investor or trader must consider a number of factors. However, one cannot assume that the forecast will be 100% accurate and come true: volatility is almost always difficult to predict.
Volatility is driven by both supply and demand from consumers, investors and traders, as well as influenced by economic and political situation, information field, emergence of new cryptocurrencies and forks. Forks are cryptocurrencies created based on the technologies of another cryptocurrency’s source code. In addition, other phenomena unique to the cryptosphere and cryptoeconomics in general are considered here.
Thus, these factors can affect cryptocurrencies both positively and negatively. Also, trade plays can be noted here when players are intentionally trying to lower or raise costs. In addition, other phenomena unique to the cryptosphere and cryptoeconomics in general are considered here.
These factors can affect cryptocurrencies both positively and negatively. Also, trade plays can be noted here when players are intentionally trying to lower or raise costs. In addition, other phenomena unique to the cryptosphere and cryptoeconomics in general are considered here.
Accordingly, these factors can affect cryptocurrencies both positively and negatively. Also, trade plays can be noted here when players are intentionally trying to lower or raise costs.