There are several factors that make cryptocurrency trading risky and crypto markets volatile. For example, one reason Bitcoin is a highly volatile market is due to demand surges for a finite number of Bitcoins (there is a limit of 21 million available), so prices can experience dramatic and significant surges.
The price of Bitcoin has surged 40,000% since its inception and one of the biggest risks to traders is this extreme volatility. Cryptocurrencies like Bitcoin and Ethereum are currently much more volatile than most traditional markets, and when excess volatility crashes, you can be faced with significantly larger losses than in other markets.
Because there is a limited amount of reputable digital asset exchanges and no single reliable price source, this could, in theory, cause the price of a cryptocurrency market to tumble sharply. Remember, cryptos are very new assets, so we don’t yet know how they may perform in a major financial crisis. Nobody knows whether any cryptocurrencies will ever become globally accepted or which ones may one day disappear or be overtaken by other cryptocurrencies.
It is also possible that certain governments may ban its citizens from holding all or specific cryptocurrencies, which may cause the price of said cryptos to collapse.
Furthermore, there is a possibility for large-scale cyberattacks on digital asset exchanges which are likely to have a strong, short-term impact on the prices of cryptos.
Investors involved in cryptocurrency trading should also be aware of the potential for a so-called “51 percent attack”. A 51 percent attack refers to one centralized crypto mining operation gaining over 50% control of the blockchain, which would allow the operation to reverse transactions, making the entire blockchain unusable with the effect that the future of that cryptocurrency might become questionable.
Remember that while this heightened volatility in the cryptocurrency markets brings opportunity, it also means a greater degree of risk. Understanding the market and managing your risk carefully with the use of stops and limits is crucial when trading cryptocurrencies. Like with any market, make sure you do your research and understand how and why the price of the crypto you’re trading moves before you start trading.