Dark areas in cryptocurrency market
...or a little bit about risks
Reading time: 7 min
Authors: Victor Lipsky, Baranov Maks
Bitcoin and cryptocurrencies in general are the first truly new asset class for the first time in about 150 years.
This unique market situation offers exceptional opportunities on the one hand, but on the other hand, it carries significant financial risks. And for successful investments, it is necessary to be able to assess them correctly.
You can often hear that the cryptocurrency market is the Wild West: endless opportunities multiplied by maximum risks.
But before breaking down what the real threats in the cryptocurrency space are for an investor, it's important to have a general understanding of how to assess investment risks.
Investment risk assessment.
First, it is proper and professional to view any potential investment in terms of the Risk/Reward ratio. The investor must realistically assess the growth potential and returns to determine whether they justify the potential losses.
Taking this parameter into account underlies the profitability of the investor's decisions.
Secondly, it is necessary to realize that absolutely any investment carries certain risks.
The most "reliable" bank deposit in the eyes of most people is insured for only ₽1.4 million. In addition, one should take into account the possibility of the DIA's refusal to pay out*. However, more importantly, the interest on the deposit does not cover real inflation, and in fact the funds on the deposit do not increase, but rather lose their purchasing power.
The recent precedents with the SPB Exchange and the asset freeze* clearly show that risks exist absolutely everywhere. And they can manifest themselves even where they seemingly do not exist.
Thus, realizing that any investment carries risks, and the main threat to an investor in today's economy is inflation, let's move on to the specific risks of investing in cryptocurrency assets.
Specific risks of investing in cryptocurrency assets.
Specific risks, as we understand them, are global threats unique to the cryptocurrency market. Understanding these threats is key to building trust in the dynamic and rapidly evolving world of cryptocurrencies.
Area of Darkness #1: Crypto Regulation
The lack of clear crypto regulation seems at first glance the most obvious risk an investor might face.
However, in reality, once we replace the concept of "Cryptocurrencies" or "Digital Assets" with "Assets", in any contractual relationship, this risk goes away by itself.
In practice, most cryptocurrency market participants, such as funds and exchanges, are registered in jurisdictions most favorable to the development of the cryptocurrency industry. In case of hypothetical litigation, they will be obliged to be considered by courts on the merits, which creates certain guarantees for investors.
Moreover, the process of adopting regulation of cryptocurrencies is moving at a breakneck pace, and by the end of 2024 and early 2025 we will be in a completely different legal field. This will subsequently create a clearer and more stable environment for investing in digital assets, providing additional confidence in the long-term sustainability of the cryptocurrency market.
Area of Darkness #2: Stablecoins
The risk of decoupling stablecoins from the U.S. dollar.
Stablecoins are cryptocurrencies whose exchange rate is pegged to traditional (fiat) currencies. And stablecoins, namely USDT and USDC, are key assets in the cryptocurrency ecosystem, pegged at a 1:1 ratio to the U.S. dollar exchange rate.
Yes, there is theoretically a risk of decoupling these stablecoins from the real dollar: in other words, for 1 USDT they may start providing not $1 but, say, $0.8 or $0.5. This could be caused by various factors, including changes in financial policy or insufficient reserve support.
However, this risk is offset by the peculiarities of the cryptocurrency market. In a hypothetical situation of decoupling the USDT/USDC exchange rate from the real dollar, all market liquidity would flow from stablecoins to the assets themselves, such as Bitcoin and Ethereum.
And this scenario could lead to a sharp rise in the prices of Bitcoin and Ethereum, which are often seen as safe havens in times of uncertainty. And this will create additional investment opportunities for investors.
Thus, Bitcoin and Ethereum in an investor's long-term portfolio actually serve as an effective hedge (insurance) against the risk of potential volatility of stablecoins.
Area of Darkness #3: Cryptocurrency Exchanges
It is "counterparty risk" that is potentially the most realistic for the vast majority of investors.
It is related to the possibility of hacking or bankruptcy of a cryptocurrency exchange. And in this case, investors may face the loss of their digital assets, which emphasizes the need to choose exchanges with high security standards and proven reserves.
It should be noted that counterparty risk is an inherent part of any type of investment - be it the stock market or the real estate market. However, in light of counterparty risk, there are 2 key recommendations for investors from Quantum Strategy:
- Do not keep a long-term portfolio of cryptocurrency assets on the exchange, but withdraw them to your wallet. As we do. This increases control over your funds and eliminates the risk of losing your funds in case of problems on the exchange - because otherwise you'll just start using another exchange.
- Carefully select the exchange you work with in case of active trading. It is important not only to pay attention to the security and credibility of the exchange, but also to consider a number of other factors: proven reserves, audits, liquidity and trading volumes, and market reputation.
Risk Management in Quantum Strategy: Security in the World of Investments
One of Quantum Strategy's key priorities is the safety and security of our investors.
We are fully aware that investing in cryptocurrencies carries certain risks and therefore we take steps to minimize them in advance.
Specific Risks:
Our intelligent mathematical models are programmed to continuously analyze cryptocurrency risks, including assessing potential threats, identifying possible scenarios and preventing threats. This allows us to identify and respond to changes in advance, minimizing the impact of negative factors, and provides us and our investors with confidence in the future and the safety of our managed capital.
Limited Risks:
Our algorithms strictly adhere to risk management, which includes a fixed risk per trade, assessing the Risk/Profit parameter when opening positions and following a trading strategy. This ensures that in every situation we adhere to a predetermined level of risk, providing stability and predictability of returns.
And our clients, even in the worst-case scenario, cannot lose more than a predetermined amount of capital, which is usually between 2 and 6%.
Absence of the "human factor":
One of the key advantages of algorithmic trading is the complete elimination of the "human factor" from the trading decision-making process. Thanks to this, we eliminate the influence of emotions and psychological aspects on investment decisions when traders trade, which significantly increases the efficiency of asset management in circulation.
At Quantum Strategy, we don't just care about risk - we level it a priori for the client, which creates a safe and secure investment relationship.
What do we end up with?
Only 1 risk is real when investing in the cryptocurrency market - counterparty risk: i.e. the exchange/fund/manager.
Similarly, it is present in any other investment, for example, in the stock market, which is traditionally considered more reliable. But in fact it is not reliability as such, but "habitualness" in the minds of the majority.
Thus, with the right approach to choosing a counterparty, we have approximately equal levels of risk in the stock and cryptocurrency markets.
And the turbulence in the global economy, sanctions and geopolitical aspects make us think about what is now a really reliable asset for investment?
We cannot ignore the fact that Bitcoin has become the asset of the decade, showing +4'444.9% over 10 years at the time of writing against +165.25% for the S&P 500 index, which reflects the US stock market, and +45.85% for IMOEX, the MSB index.
Comparing the return on the stock market with inflation in Russia, which only according to official data amounted to a total of 99.10% over 10 years, we clearly understand that investments in the stock market in the best case only slightly exceed inflation...
And here we come to a seemingly unobvious conclusion: in conditions of the same level of risk as the stock market, the cryptocurrency market gives a potential opportunity to get a much higher return.
In the stock market, the best outcome for your investment will be limited to capital preservation, and the results will only be close to the inflation rate. While the cryptocurrency market, with a professional approach, offers the opportunity to not only preserve your capital from inflation, but also to significantly increase it.
Therefore, not investing in the cryptocurrency market is now even more of a risk than investing in it.
And if not investing in this market now, when? We are at a particularly important moment in time, both in terms of global economic cycles (before the Fed interest rate cut and the U.S. presidential election) and domestic industry processes (Bitcoin halving and ETF adoption).
Quantum Strategy and our artificial intelligence algorithms, trained on vast amounts of historical data, are ready to be your guide in the world of cryptocurrency investments, making this process simple, clear and most importantly - safe.
*The DIA's refusal to pay:
https://www.kommersant.ru/doc/3253884
https://www.kommersant.ru/doc/5304986
**Precedents with the SPB Exchange:
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