BTC, the first Cryptocurrency, is a pretty simple structure. It’s intended to send, receive, and store value in a virtual and encrypted format, with functionalities similar to money. The currency is virtual where facilities also come along with several threats. Risk managers should be conscious of at least four unique problems while dealing with cryptocurrencies.
Volatility
One of the most critical issues facing the cryptocurrency sector is its volatility and the fact that, unlike traditional currency markets, cryptocurrency markets are a social construct. Moreover, all bitcoin transactions are carried out through the internet, posing particular challenges in terms of paperwork. Because of Cryptocurrency’s online nature, many people, particularly regulators, are skeptical of its legality and suspect it is primarily utilized for criminal purposes like money laundering and drug trafficking.
Trust building
Creating confidence among authorities and customers, with the ultimate objective of ensuring the existence of cryptocurrencies, is one of the significant issues that Cryptocurrency faces. Building trust in Cryptocurrency from a regulatory standpoint involves establishing policies and procedures for customer scrutiny, handling cryptocurrency transactions and trades, and utilizing technology to document and communicate those policies and procedures to the appropriate parties.
Earning the trust of authorities also entails keeping accurate records that are legally defendable thanks to technology. Such records should include information on which processes for vetting clients were followed, when, by whom, and in what jurisdiction the vetting occurred, and what information was communicated with customers at each stage of their trip. Records must be kept on the consumer side to capture the conditions of all transactions and the messages delivered to clients throughout their journey.
Regulators will have more confidence in the validity of individual firms’ bitcoin activity if they access comprehensive data. They will believe that businesses are behaving in good faith. They will distinguish between good and bad actors based on the openness of data and the absence of secrecy around information disclosure. Customers will feel the same way, boosting their desire to invest in cryptocurrencies rather than cash for other causes.
Prone to Cyber-attacks
Although technology has progressed significantly to provide optimum protection, hackers continue to follow trends and adapt simultaneously. Most exchanges have centralized risk, which renders them vulnerable to cyber-attacks. A more decentralized method may provide the maximum security that most users seek. If you’ve ever worked with money over the internet, you understand the need for security.
According to Coin Desk’s figures, almost $3 million is stolen from exchanges virtually every day. The year 2018 was the peak year for hackers, with thirteen times the quantity of products taken in 2017. Using the amount mentioned above, you may compute that $1,860 is lost per hour.
Lack of Liquidity
You should know that all markets have liquidity as their foundation ingredient, just as you should know that air is made up of 78 percent nitrogen and 21% oxygen, with traces of many other gasses in the remaining 1%. If there is no liquidity on the market, it indicates that it is in an unbalanced state and that someone has lost control. When liquidity is constrained, powerful holders can exert control over prices and manipulate them at a whim. Costs can become unpredictable in a market with little liquidity, which is a problem because Bitcoin is already volatile.
Furthermore, in a market with insufficient liquidity, the major players, in this example, the exchanges, will wield power, and you will be denied a fair chance to profit from trading. This is already happening since massive businesses prefer to issue tokens from significant players with $1 million in cash. This indicates that the people who give the tickets are in charge.
Conclusion
Cryptocurrency is a digital currency facing many acceptance issues and threats in the market. Reasons like volatility, trust-building of the investors, higher chances of hackers attacks, and the lack of liquidity if fixed through better strategies and policies can increase the trading of Cryptocurrency through immediate profit.
