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Are The Risks of Trading Cryptocurrencies Higher Than Trading Forex?

Risks of Trading Cryptocurrencies

June 26, 2020 | 

JOHN K MWANIKI |  0 Comments| 

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The forex market is currently the most liquid and largest in the world. It is decentralized, and this is where all currencies found inside the world are traded. Many factors influence the Forex market.

Such factors include job reports, political developments, as well as inflations. Trillions are traded at the Forex each day. On the other hand, cryptocurrencies are digital currencies

Unlike currencies in the Forex that are founded upon a centralized government, cryptocurrencies are not. They are found online, and they receive backing from person-to-person authentication, restricting you from using crypto more than once.

The cryptocurrency market and the forex market are separate trading markets. At one point, the global crypto market had reached a cap of over $700 billion, and predictions have already been made to indicate that this number may increase. These two markets are similar in several ways. 

For instance, they both involve the exchange of one currency for another. These markets are, however, influenced by different factors. In the same way that they have similarities, both the crypto and Forex markets come with their risks. Here are some common risks associated with both markets.

Risks associated with forex trading

1. The exchange rate risk

The exchange rate risk is caused by shifts in the value of a currency. This risk is based upon the consequences of continuous and most volatile changes; in the global demand and supply balance. As long as your position as a trader is standing, you are subject to any price changes. 

Exchange rate risk may be substantial and based on the market’s perception, where currencies will move depending on all factors that may happen anytime, anywhere in the globe. Moreover, due to the largely unregulated off-exchange Forex trading, there aren’t any daily price limits imposed like in the case of futures exchanges. 

The Forex market moves depending on technical and fundamental factors.

2. Interest rate risk

This is another risk that is associated with Forex trading. It refers to the profits and losses that result from fluctuations in forwarding spreads; and forward maturity gaps and amount mismatches in transactions inside the foreign exchange book.

The interest rate risk is subject to futures, forward outright, and options. 

If you want to minimize this risk, you should limit the mismatches. A common way to restrict the mismatches is to separate them, based on their dates of maturity. Continuously analyzing the interest rates is also vital to foretell future changes that may affect the outstanding gaps.

3. Credit risk

Credit risk is the chance that there will be a failure to repay an outstanding currency position as per agreement. This failure may be either as a result of involuntary or voluntary action by counter-parties. Credit risk is usually a concern for many banks and corporations. Credit risk is usually low if you are an individual trader or company regulated by various authorities in G-7 nations.

Risks associated with crypto trading

1. Cryptocurrencies are illiquid, intangible and uninsured

One of the beauties of cryptos is that there isn't an issue of double-counting without an intermediary such as a bank. However, this digital singularity feature of cryptocurrencies is risky; because it also makes cryptos illiquid and intangible. 

This illiquidity and intangibility hamper the ability of these currencies to be insurable and convertible. Currently, most crypto companies and crypto-assets are uninsurable or under-insured according to today's standards. There is also no deposit insurance "floor."

2. Control, care, and custody

One of the most pressing issues plaguing the cryptocurrencies trading market is control, care, and custody. Like in the traditional banking sector, it is plagued by security breaches.

There are conventional wars among crypto custodians regarding who offers the highest asset security and investor protection standards. However, going by the numbers of high profile crypto heist, the question of best security is very debatable. 

Very wealthy crypto investors are taking measures such as building physical bunkers and vaults. If you are not a wealthy crypto investor, you may not be able to acquire this security level. The gaps in capital and security guarantees of crypto trading are, therefore, very worrying.

3. Manipulation and extortion

As an investor, you should never part with your hard-earned money, or spend it if you are not prepared to, regardless of the amount. Cryptos are especially subject to misinformation risks and social engineering.

Hence if you are naive, you may easily become a victim of market manipulation, fraud, or cyber extortion. Therefore you should educate yourself with the specific cryptocurrency that you want to trade in; to tell real opportunities from “shiny objects.”

These are some of the main risks associated with both Forex and crypto trading. As cryptocurrencies trading is generally new compared to Forex trading, there may be more room for improvement.
 

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