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risk

Introduction to Risk (Part 1)

By Sergei Nemetz | BasicTrading | 3 Oct 2020


WHAT IS RISK ?

Risk has many definitions. Risk is many things.

Look here, according to Webster:

Risk is the chance that an investment (such as a stock or commodity) will lose value.


A stock, or a commodity ... or a digital intangible asset (aka crypto).

So, basically, one of the many meanings of 'risk' is the probability that you buy your favourite crypto at USD 10k apiece, hold it one day (also called HODL strategy, by people who cannot spell), and next morning you discover your digital gold is worth, say USD 5k apiece, or zero (zero USD, = nothing, it is worthless).

How come ?

Well, there can be many reasons (=there are many kinds of risk), and I am naming some of these reasons below. And if these reasons do not frighten you enough, well, then I guess nothing will.

Some of the reasons why digital gold may become digital lead:

Technology risk : Crypto assets are heavily technology-dependent. From the Internet to the blockchain structures (nodes, miners), from the protocols to the databases, from sending someone the wrong half of your keys to dropping your cold wallet into the toilet - you are exposed to countless technology traps that may seriously affect the value of your crypto assets.

Counterparty risk : Whether your trading platform is of the CEX or DEX variety, you are always running the risk that the party that trades, exchanges, transfers or otherwise handles your crypto assets will blow it. You may be the best and nicest bloke on this planet, but the other girl or guy may slip up, make a mistake or intentionally mislead you. If they fail or under-perform, this is you counterparty risk.

Political and country risk : Political risk is the risk of one Mao Tao pulling the plug and rendering your crypto inoperable, unattainable or otherwise seriously weakened. This is also the risk that politicians will tax your crypto 5%, 50%, or 95% (100% is also possible). (Read most recent publish0x posts on relevant news from the US and the EU tax offices).

Liquidity risk : Liquidity risk is the risk that the price of the asset will be fine, but you will not be able to sell it off - for there will be nobody willing, or able, to buy it. A price as listed is always either a past transaction price (past, hence you cannot get it), or a bid. However, a bid price is always limited by the liquidity (availability) - so while the price quoted at some XEX exchange is say 10k, the bid may contain only 1 coin, and you want to sell 100 coins. No do. Hence, liquidity risk.

Foreign-exchange risk : When playing the crypto game from one of the smaller countries, you may run into the necessity to buy USD or EUR first, then using the USD/EUR you can buy your crypto. However, when you sell your crypto, the USD / your currency exchange rate may be quite different. At this point you may discover you lost money in the process.

Interestingly, this last risk works both ways - e.g. if your country has very high inflation, you may earn local money - not only on the exchange rates towards USD, but also on the crypto asset (should the crypto asset price have moved up).

Should I continue, or are you frightened enough ?

Yes, the list is much, much longer. Vide the link below the text.

;-)

In summary : Pay attention to the simple fact that crypto IS a risky business. It is more risky than buying gold and holding it. It may be a bit less risky though than swimming in a pool full of piranhas, alligators and big whites.

Stay tuned for part II - where I will very briefly explain another important meaning of the frightening word RISK.

(This is part I of my briefest introduction to risk in digital intangible assets (BTC/ETH/etc). This kind of assets is often referred to by names of 'crypto', 'crypto assets', 'digital coins and tokens', etc. My posts are meant for absolute beginners and adventurous housewives.)

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Sergei Nemetz
Sergei Nemetz

I am a professional trader and a licensed stock broker. I retired early to travel and follow my burning passions. When my travels and passions burned big holes in my pockets, I returned to trading. Today I trade mostly gold and digital pseudo assets.


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