How To Handle Virtual Currency Risks And Precautions?
Blockchain technology and its products, one of the most popular fintech developments of recent years, create new asset classes in financial markets, but they also bring with them many risks that can be defined as virtual currency risks.
Although virtual currency investments offer a higher return potential than traditional investment types, they also include many risks such as volatility, cybersecurity threats, and non-compliance with regulations.
However, fortunately, there are ways to combat all these risks and maintain financial stability under all conditions. Unlike traditional asset classes, virtual currency risks should not be neglected in our virtual currency investments.
Managing portfolios with a reputable and reliable virtual currency platform is the best way to eliminate these risks. In addition to choosing a reputable and reliable virtual currency exchange platform, login methods that require additional verification, such as biometric verification methods, will also prevent anyone else from entering your accounts.
However, combating risks related to market volatility depends entirely on mastering market dynamics and utilizing risk management strategies.
What Are The Main Virtual Currency Risks?
There are some basic virtual currency risks in cryptocurrencies, which are a completely digital and new type of investment compared to traditional investment models such as gold, dollars, and real estate. The most common ones can be listed as follows:
Volatility: Unfortunately, price fluctuations are frequently experienced in virtual currency markets where digital assets such as cryptocurrencies are located compared to other markets.
Although this may seem risky, it can sometimes be the reason for high returns. Rapidly changing market conditions and volatility are one of the most critical virtual currency risks.
Cybersecurity issues: One of the most important virtual currency risks is cybersecurity issues.
Although many cryptocurrency exchanges and digital wallets today are protected against such hacks/attacks, investors have suffered losses after digital attacks on many exchanges in the past.
Incompatibility with regulations: One of the most difficult risks to solve among virtual currency risks is incompatibility with regulations.
Although cryptocurrencies are well-known asset classes all over the world, they are not officially recognized by the political and financial authorities of every country, so there is a lack of regulation.
How To Identify Virtual Currency Risks Before Investing?
If you want to determine virtual currency risks in the most accurate and clear way before starting an investment project as a professional investor, a few steps will suffice. First, you should do detailed market research.
Before investing in a cryptocurrency, you should scan the resources about this virtual currency and take a look at the whitepapers if any. This is how you can understand the goals and future perspectives of the projects.
After determining which cryptocurrencies you will invest in, research the exchanges that are known to be respected and reliable in this field. At this point, you can benefit from customer feedback.
Preferring well-known platforms such as Binance and Coinbase is very important in combating virtual currency risks.
In today’s virtual currency markets where there are thousands of different coin types, sudden price fluctuations are more frequent in those with low trading volumes, and it will be easier to combat virtual currency risks if the more popular ones are included in the portfolios.
Precautions To Minimize Virtual Currency Risks
Compared to traditional investment types such as real estate and gold, virtual currencies, which carry more risks, become a very profitable investment model when the necessary precautions are taken.
There are many ways to minimize virtual currency risks in this new ecosystem that Blockchain technology offers to today’s financial world. Using cold wallets where you store cryptocurrencies is one of the most common ways to minimize virtual currency risks.
Your virtual currencies can be always protected thanks to hardware wallets such as Ledger and Trezor. The reputable and reliable platforms where you purchase your virtual currencies are also of critical importance in minimizing virtual currency risks.
In particular, login methods such as 2-step verification and biometric verification make it impossible for anyone other than you to access your portfolio. In addition to security measures, there are several ways to minimize virtual currency risks financially.
Taking advantage of risk management strategies and diversifying your investment portfolio are the most important ones. Investors’ financial literacy levels are quite decisive in combating virtual currency risks.
If an investor does not know the dynamics of the markets, how to use basic and technical analysis tools, and how to analyze market charts, they will probably make investment decisions based on emotional reactions and it is impossible for them to be successful in the long term.
Common Mistakes That Increase Virtual Currency Risks
Some common mistakes made by many investors make it difficult to combat virtual currency risks. These common mistakes, which can be valid not only for virtual currencies but also for almost all investment models, can be listed as follows:
– Making sudden decisions with FOMO: Fear of Missing Out, is seen as the fear of missing out on opportunities while all participants in the market are winning in virtual currency markets.
Big profit stories are usually told about many cryptocurrencies. Such success stories can make investors feel this emotion and lead them to make quick decisions.
– Fast trading without doing research: Many investors start trading with cryptocurrencies without mastering market dynamics and without gaining basic financial literacy.
For this reason, they make emotional decisions that are not in line with their risk management strategies.
– Not keeping private keys: Security gaps are one of the most important virtual currency risks. If you do not keep your crypto wallet keys secret, there will be possible security problems in the future.
One of the common mistakes that causes virtual currency risks to increase is not caring about these keys.
How Do Virtual Currency Risks Impact Financial Markets?
Especially in the early days of blockchain technology, virtual currency risks had a great impact on financial markets. New, digital, and secure virtual currency was initially considered very risky by people accustomed to traditional investment models.
However, after a certain period of time, many profit stories began to spread. Thousands of investors entered virtual currency markets and a new digital era began in financial markets.
Changes in virtual currency markets affect the mobility in stock markets.
Regulations and fintech developments have led to the formation of new markets. It has become an officially recognized asset unit in many countries. In this respect, it has affected all markets. When managed correctly, virtual currency risks can have positive effects on markets.
The Role Of Regulation In Reducing Virtual Currency Risks
Regulations and local government units play a major role in investors’ struggle with virtual currency risks. Although virtual currencies are officially recognized asset types in many developed countries today, many countries unfortunately continue to experience regulatory problems.
However, regulations play a significant role in investors’ struggle with virtual currency risks. It is possible to comply with international security procedures and standards such as KYC and AML with regulations and audits.
In addition, regulation also includes taxation policies. When cryptocurrency earnings are taxed in the near future, legal uncertainties will be reduced and virtual currencies will be a safe investment model for everyone.
The main reason why customers and businesses experience problems in countries that do not officially recognize cryptocurrencies in global e-commerce projects is regulatory uncertainties.
However, I think there is a negative aspect that will completely decrease in the near future.
How To Diversify Investments To Avoid Virtual Currency Risks?
One of the most useful strategies for investors who want to avoid virtual currency risks is diversification strategies in their investment portfolios. Unlike the dollar and the euro, cryptocurrencies have rapidly changing market conditions.
The value of a virtual currency you own can increase by 10 times overnight, but it can also decrease by one-tenth in an hour. In virtual currency exchanges, which are a risky market in terms of liquidity and volatility, distributing your assets to different currencies instead of a single currency is called a diversification strategy.
One of the ways to protect yourself from virtual currency risks is to allocate a share to traditional investment models. While buying virtual currency with some of our assets, we should allocate a share to traditional and safe-haven investment models such as gold, dollar and real estate.
In addition to these, do not forget that you should also change these diversification strategies and rates under different market conditions.
Diversification is a very good strategy in virtual currency investments, as in traditional investment models. Thanks to this strategy, all of your assets will not be affected by a possible sudden price fluctuation. In this way, you will protect your financial stability in the long term.
However, in investment portfolios managed with a single investment class, a possible crisis may result in the loss of all your assets.
Tools And Strategies To Manage Virtual Currency Risks
There are many tools and strategies to better combat the risks of virtual currencies, which are digital assets. Crypto wallets are very useful when combating security risks.
Thanks to hardware wallets such as Ledger, and Trezor or digital mobile wallets such as Trust Wallet, your assets are protected with high security standards.
While dealing with virtual currency risks, many tools and side applications offer solutions today. Numerous resources on the internet contain educational materials for investors. In addition, the number of virtual currency platforms offering fundamental and technical analysis tools is increasing.
With so many resources and content available today, developing wrong investment strategies would not be a good choice. In addition, risk can be minimized with auxiliary tools such as automatic stop-loss orders and leverage ratio setups offered on many stock exchange platforms.
In this way, you can make a profit at the rate you determine or optimize the amount of loss that suits your risk tolerance. In addition, there are many third-party tracking applications on online resources.
Thanks to these, you can combat virtual currency risks in the fastest and easiest way. Thanks to online resources, you have the chance to instantly observe and follow market data.
Lessons Learned From Virtual Currency Risks
Although virtual currency markets are still a new market compared to other markets, many success and failure stories have accumulated in this market in this short time. Thanks to these crises, we, as investors, have a better understanding of what we need to do while fighting virtual currency risk.
For example, the Terra (LUNA) crisis in 2022 is one of the first that comes to mind. The LUNA cryptocurrency, whose value fell by tens of times, caused a great decrease in the value of many investors’ assets.
Moreover, this decrease occurred in a very short time. However, on the contrary, there are virtual currencies such as Bitcoin, whose value increased tens of times in a very short time. In all these stories, we remember that we need to invest in accordance with our risk tolerance.
Cryptocurrencies experience sudden exchange rate fluctuations due to their volatile markets compared to traditional investment models. In such cases, if a single cryptocurrency type is invested in, it may be impossible to maintain financial stability.
In order to avoid such bankruptcy scenarios, 2 main diversification strategies should be implemented. The first of these is to distribute assets to different cryptocurrencies while the other is to distribute them to different investment types.
For example, while investing in real estate with a certain portion of your assets, allocating a certain portion to 6 different cryptocurrency types. Such a portfolio is much more successful and therefore profitable in terms of risk management.
Future Challenges And Virtual Currency Risks
Despite many virtual currency risks today, digital asset models are becoming more popular every day and many countries are starting to recognize them as an official asset class.
While many advantages of cryptocurrencies will become even more important in the future, the future may include some challenges.
Cryptocurrencies that we can define within Decentralized Finance ecosystems may also cause some problems in terms of regulation in the future, which is among the most common virtual currency risks.
In the future, quantum computers or advanced artificial intelligence solutions can be expected to manipulate cryptocurrency markets.
In addition to these, CBDCs, which are digital asset units developed by states, can also transform market dynamics like traditional investment models which we do not desire anymore.
See you in the next post,
Anil UZUN