There are significant risks and benefits of bitcoin trading. Like in cases with most investments, the pros and cons also depend on the investment strategy and investment timeline. Additionally, traders may face market failure risks that developed financial markets seek to eliminate by regulation.
There is no doubt that cryptocurrency traders have reasons to worry about their cryptocurrency investments. One reason for worrying is that cryptocurrency markets can show extraordinary volatility. However, it does not only create risks but generate opportunities for profit. And in some circumstances, it can create profit margins rarely seen in traditional markets.
For startup companies, the power of Initial Coin Offerings (ICO’s) allows them to streamlined access to capital. For businesses transacting internationally, there are two use cases for cryptocurrency. First, cryptocurrency allows greater market access for buyers and sellers. Second, transaction costs are reduced in some cases by eliminating the need for financial intermediaries.
What are the risks of cryptocurrency?
By storing cryptocurrency on a platform’s exchange all control and responsibility for that wealth are placed in the exchange. If the exchange’s security is compromised, there is a very real risk that investors can lose their entire position held on the exchange.
Therefore, nowadays exchanges are trying hard to achieve greater levels of security. Although the value of exchange hacks is smaller, there are a larger number of hacks occurring. As technologies develop, the risk becomes more reduced. However, this threat is a very real concern and something each investor should take into consideration.
The cryptocurrency market is immature. It is also largely unregulated. Cryptocurrency is characterized as a free market and as time goes, its commercial adoption is increasing. In the future, this could lead to less volatility in cryptocurrency markets.
Since the market is in its infancy, even understanding the cause and effect of cryptocurrency price movements can be difficult. This means that investors are likely to be exposed to one of the most unpredictable asset classes.
Market failure & regulatory risk
Market failure in cryptocurrency markets can be hard to identify which makes seemingly good investments a potential trap. There is an endless list of cryptocurrency scams. Some types to be aware of are: overnight exchanges, pyramid schemes, fraudulent wallets, phishing scams, identity theft, unregulated brokerages, and the list goes on.
What is meant by regulatory risk? Regulatory risk is the problem that occurs when government policy can harm investments with the possibility of negatively affecting business outcomes. For some investors, this could mean capital gains tax, applied to income from cryptocurrency trading. For others, it could mean governments confiscating cryptocurrency and related items such as mining hardware equipment.
What are the benefits of cryptocurrency?
Improves supply chain (smart contracts)
The business case for blockchain technology in some sectors is enormous. Logistics is one sector that is benefiting from the technological advance. Some estimates value the global economic benefit as high as the US $3 trillion per year.
Soon enough blockchain-based smart contracts will be able to automate existing payments and impute them instantly to a blockchain. What this means is that rather than banks settling transaction days after they have taken place, businesses will have the power to settle a trade instantly and directly with the consumer.
Removes financial intermediaries
The technology for storing cryptocurrency securely is advancing rapidly. With mobile banking applications, consumers and businesses already have the power to transact directly anywhere in the world. Nevertheless, blockchain-based transactions have another benefit – no need for a third party.
Historically, international trading has been dependent on financial intermediaries guaranteeing payments across borders with other trusted financial intermediaries. However, international payments no longer require trusted third-party intermediaries because of blockchain technology and the power of cryptocurrency. This reduces fees, improves cash flow and speeds up the trading process.
In the first quarter of 2020, the average market capitalization of all cryptocurrencies was around US$20 billion. Towards the end of 2017 cryptocurrency markets were on an unprecedented bull run. At that time the market capitalization of all cryptocurrencies peaked at US $850 billion.
During that bull run, 24-hour trading volumes of over the US $30 billion were seen for the first time. In today’s market, 24-hour trading volumes are regularly over the US $100 billion. This pattern is also true for established financial exchanges in the US. This indicates that there is still a copious room for the cryptocurrency market to grow.
Streamlined access to capital
Now, let’s talk about the big one. ICO’s. It has never been simpler for a business to access funds. Never. The connectedness that the internet provides means anyone, anywhere, anytime can communicate freely. With the blockchain, this same power now extends to transmitting money. This is huge news for those starting up businesses or for those looking to invest in the next Microsoft because ICO’s enable that.
The bottom line of risks and rewards
There is some truth in the statement that cryptocurrency and the blockchain are a kind of revolution. However, it seems that it is more of a very fast-paced evolution.
Money itself has existed in various forms for over 5,000 years. It is only natural that people decided to create money that can be transacted through the internet. However, the absence of the intermediate party is something that very few of us could expect to happen. In that lies the true revolution. Nowadays, these technologies keep on integrating into our daily lives.
Cryptocurrency is an extension of that, giving people greater power to interact. However, possibilities always come with a risk. Some people are trying to scam others in the digital world just as they do in the physical world. There are numerous means to reduce fraud activity available already. But there will always be a risk and learning about it and understanding it provides the wisdom to manage it.