What is Cryptocurrency?
Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies. Bitcoin became the first decentralised cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created.
On one level, cryptocurrencies function just like cash - all that’s different is their entirely virtual nature. On another level, these new currencies, which use peer-to-peer payment technology, remove the long-time players from the equation.
Central banks, mints, financial institutions and regulators, and established transaction networks such as SWIFT, NACHA and existing card platforms are out of the picture and are figuring out how to adapt to stay current. The resulting environment is uncertain and risky as decentralised cryptocurrencies such as Bitcoin now provide an ability to gather personal wealth that is beyond restriction and out of reach.
Cryptocurrency: new haven for criminals and money launderers
Virtual and cryptocurrencies have suffered many high-profile failures over the years, criminality and controversy has stalked the idea of cryptocurrencies. But it’s not just the marketplaces and currencies that are subject to misfortune. Malware created specifically to steal Bitcoin and any of the 200 other cryptocurrencies currently in circulation has emerged, fuelled by a rapid increase in value of Bitcoins recently. Attacks are commonly aimed at Bitcoin wallets and the compromise of private keys.
But one thing is perfectly clear; criminals have already adapted their attacks to include these platforms wherever and whenever the opportunity arises. Financial institutions need to remain vigilant and be agile to stay ahead of nefarious actors and ensure they remain relevant in an increasingly virtual, mobile and hyper-connected world.
Prepare and protect against the risks of virtual currencies
The paper below discusses how Cryptocurrencies like Bitcoin have forever changed business and personal finance, the compliance risk, and how to stay alert to the cyber risk and pitfalls of virtual currencies.
Financial institutions need to prepare and protect themselves against both direct and indirect vulnerabilities, by understanding the money laundering, fraud and cyber risks associated with cryptocurrency and by monitoring the evolving guidance, registers (for example of licensed Bitcoin businesses), and attack vectors. A financial institution can more effectively mitigate cryptocurrency risk by integrating third-party data and negative news with the activity of their own account holders.
A combination of both technical and fundamental analysis can be used to determine the true worth of a company or asset, securing a greater chance of success with a particular investment while reducing your risk along the way.
But for that, you need a plan.
Mastering your emotions
Developing a successful risk management plan is paramount in minimizing unexpected outcomes, translating into an overall reduction in your losses.
A successful risk management plan should also run parallel to your crypto trading journal records, working in conjunction to curb poor trading behavior while simultaneously justifying your fundamental expectations.
Sometimes temptation leads to poor choices and it is no more on display than a market driven by fear and greed.
By reducing harmful or negative trading habits, one can hope to increase profit without putting too much on the table.
A key component of a successful risk management plan is determining what kind of trader you are and where your skills currently lie:
From these personas you can draw a rough idea on where you currently sit in terms of your trading mentality. The idea is to identify what habits are forcing you to lose out and which habits are guiding you to profit.
Try to remain stoic and reasoned, removing emotion from the psychological aspect of trading while relying solely on the information in front of you such as the price, volume, news and trend.
Don’t put all your eggs in one basket
No matter how tempting or promising a particular trade opportunity may appear it is never a good idea to place all of your worth on the line.
Generally, a spread of one particular type of asset class (as well as a generous mix of different asset classes within your portfolio) is an ample measure in reducing your exposure to larger price moves within a particular industry/market.
The volatility of the cryptocurrency market means that any trade, even a seemingly perfect trade, can collapse and result in a significant loss. Therefore, it is recommended that you start investing in 5 or more different coins.
Also remember to take advantage of an exchange’s stop-loss feature and use it to your benefit when you are away from trading manually such as times of rest or at work.
Time and again new traders fail to incorporate an adequate exit strategy, often arriving back at their computer to find their beloved basket of crypto have dropped 20 percent and a new trend has developed to the downside. This act not only reduces your risk but allows for greater control over your losses.
Finally, it can be tempting to use a buy and hold strategy where you invest in a coin and refuse to sell for an extended period of time. This passive approach is often tempting to new traders due to its simplicity and is often falsely associated with reducing one’s risk.
However, you’ll unlikely amount to any significant wins by playing it too safe, so dive in, take on the adequate risk and ensure you have a plan mapped out because trading crypto can be a fun and profitable endeavour when executed correctly.