Risk factors of cryptocurrency are listed and evaluated compared to the mutual fund, stock, and FX.
Risk factors List
The list is following with additional explanation to cryptocurrency.
|1||Price fluctuation risk||Y|
|9||Error Xfer risk||Y|
Uniqueness is identified to each risk item if such item is unique in quantitative or qualitative.
Risk factors Explanation
Risk factors are described here with comparisons to traditional investments.
1. Price fluctuation risk: Uniqueness - Yes
Price fluctuation occurs in every investment products, such as stock, the mutual fund.
However, cryptocurrency price fluctuation is too big. It sometimes drops 40% drops in a day, or increase in a day.
Due to this volatility, it is a little bit difficult to employ traditional risk control, such as trailing stop or stop limit order.
I also see if some coins drop 30 % in a day, it will bounce back in a few days.
So, trigger at price - 30% or -40% will lose your money.
This is fist pickup risk in cryptocurrency trading.
Liquidity risk: Uniqueness - No
This is a risk that you cannot sell your position in a certain period.
In case of stock, you cannot sell if you find bad news about the company of the stock on Saturday or Sanday.
It is also same to FX.
You may buy a fund that you cannot sell more than five years.
I've bought this type of close funds. However, the performance of the funds was so bad, though, at the beginning of investment, I believed 100% possibility of great returns.
If I found bad news or market trend change, I could not sell them. This means liquidy risk.
In my mind, it is one of biggest issue for me.
If this is applied to cryptocurrency, for example, the big crash happens and everybody tries to sell bitcoin, however, the network is down, thus, people cannot have the transaction. This can be considered as liquidity risk as well.
I've already experienced this issue when certain cryptocurrency exchange server was too heavy to react.
I would avoid such exchange place.
Default risk: Uniqueness - No
In speaking of stock, this means company bankrupt.
For cryptocurrency case, this is if the exchange place cannot pay your money what you have exchanged for local real currency.
This may happen if a very big amount of people sold a big amount of cryptocurrency. Usually, there are persons who pay for your cryptocurrency by buying.
But if this buy is done by the exchange place, or cash management fails, then it may happen.
Country risk: Uniqueness - Yes
Usually, it is thought that certain country has a war situation, or other direct impacts of typhoon, or confusion of politics in the stock market.
In this case, stocks of the country fall.
In cryptocurrency, some country suddenly regulates cryptocurrency trade, or try to close in-country cryptocurrency exchange. In this case, it is considered as the country risk.
If a specific coin is issued in this country, there will be an impact.
Regulation risk: Uniqueness - Yes
This is similar to country risk.
Suddenly, some country put tight regulation for cryptocurrency trading.
Cryptocurrency does not usually have center controlled authority, but the benefit is usually controlled by each country tax authority.
Therefore, if regulation is too tight, there will be a possibility to lose the value of cryptocurrency.
Counterparty risk: Uniqueness - No
This is the case that if you try to close your position of derivative, counterparty bankrupt and you cannot close your position, then lose your money.
If your cryptocurrency is sold and bought by the cryptocurrency exchange, you will have this risk.
This mean, if you try to sell your all cryptocurrency in a certain exchange, the exchange will not buy your selling due to bankruptcy. It is questionable that in this situation, whether you can send your cryptocurrency to other exchange.
System risk: Uniqueness - No
This is computer trouble risk that will stop your transaction, then lose your change of selling or buying.
Since transaction amount is too big, this happens and cryptocurrency will have this chance if trade amount becomes too big and sudden selling happens by the very bad news.
Market risk: Uniqueness - Yes
Usually, market risk is similar to price fluctuation risk.
Or risk when supply/demand balance becomes deteriorated.
However, in cryptocurrency case, I define this is a risk that cryptocurrency market as a total loose confidence due to some big drawback.
For example, if you think of stock of 'Amazon', you use the Amazon frequently and you see the value of the stock of the Amazon.
However, most people do not use cryptocurrencies, right?
It will not be utilized domestically since transaction cost is expensive. Or transaction need records for tax payment.
This is too complex to use comparing real money.
If any coins are utilized in real in future, this risk is not big. However, if only limited coins are just used, then people doubt about cryptocurrency.
I see inter-country transaction such as XRP will be major. However, I do not want to complex tax calculation by myself.
Error Xfer risk: Uniqueness - Yes
Usually, in banking, many steps for error transfer of money is held. Even if you make a mistake to the wrong person, then you may get money back since the name of the person and bank account is clear.
However, for this cryptocurrency, this is not assured. If you send incorrect address, it will be difficult to get back your name, since there are any company as a mediator and you don't know the name of the person who received your cryptocurrency.
Just be VERY careful about sending your cryptocurrency.
Hacking risk: Uniqueness - Yes
This may happen to any computer network.
However, for the cryptocurrency, this risk is bigger than other since there is no specific authority to track this issue, and address used in cryptocurrency is anonymous.
It is said that blockchain is safe if more than 51% of the computer is normal.
However, what happens if a simultaneous attack happens to part of this computers?
The weak point is cryptocurrency exchange.
There is much hacking news for the exchange.
Yes, it is not strictly controlled by the authority of the banking system.
Due to non-sufficient regulation, I doubt the cryptocurrency exchange, compared to my whole survey of 30 banks and stock company.
There is no phone number to ask, and a reply is too late sometimes.
We need to select BEST cryptocurrency exchange!
Network risk: Uniqueness - Yes
This is similar to system risk.
In cryptocurrency, the distributed computer system is used with the network.
However, if there are too many transactions, the network will be down.
Then you lose change of selling or buying.
This does not usually happen, but in case of a sudden crush of cryptocurrency, it may happen by the tremendous numbering of selling.
Decryption risk: Uniqueness - Yes
This may happen in the certain small period when quantum computer advances and solve encryption.
In this period, confusion will happen and the transaction will stop or much-selling may occur.
However, to change encryption will be done easily in short period.
I hear "It cannot be happening?". But it does not matter if this happens or not. If this happens, what shall we do? This is risk management, called "What-if risk analysis."
See the following article as well.
Cryptocurrency risk factors are introduced.
I will write another article how to control this risks.
Please be looking forward to checking the article!