Cryptocurrency (bitcoin, ethereum and thousands of other crypto coins) is quickly growing in popularity but this new asset class contains 2 major risks that most new investors are not prepared for.
First, crypto markets are extremely volatile. This means that the price changes are extreme from one moment to the next. One day bitcoin is up 20% and the next day it is down 30%. Volatility risk is serious because if you buy at the wrong moment it can be very difficult to recover and make a profitable investment. Think about how long it takes you to save $3,000. If you go and invest in Bitcoin tomorrow, it might drop 20% the next day. In that case, your account value is down to $2,400 after just one day! That’s pretty scary. To make matters worse, to get your account back to $3,000, Bitcoin would need to rise 25% just for you to break even. Yikes!
Second, some cryptocurrencies have low trading volume. This means that there are not a ton of buyer and sellers (yet) for the specific crypto coin like there are in the stock market. This means it can be difficult for you to enter or exit your investment at the price you expect. For instance, imagine you bought 10 Ethereum for $300 per token ($3,000 investment), and the price rises to $400. You would think you “made $1,000” on your investment. You are technically correct, on paper, but if you come across a situation where there are only 2 interested buyers, who are both only willing to pay $390 per token, then that is the price you will have to sell at. In this case, you made $900 (minus transaction fees) instead of $1,000. That is a 10% difference! Granted, this is more of an extreme case for a popular coin like ethereum, but this is certainly an applicable use case for less popular coins.
It is only a matter of time before cryptomarkets go mainstream. As participation increases, and more buyers (and sellers) enter the market, the aforementioned risks will begin to deteriorate as prices become more stable and the ability to buy/sell will become faster with less price volatility.
CEO of TradeDuel