Issues in The Cryptocurrency Market

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issues in the cryptocurrency market

Different cryptocurrency exchanges may offer other cryptocurrencies that charge varying fees and have additional terms, policies, payment methods, and prices. In addition, several exchange platforms have extra security, user-friendliness, functionality, and design. These elements can all play a role in determining the most appropriate transaction.

Regulation of digital currencies and crypto exchanges is being discussed to help the market become more healthy and transparent. However, cryptocurrencies and exchanges do face numerous concerns and challenges. Here, we’ll discuss some of the significant worries and recent issues impeding the crypto revolution from moving further.

Risk managers frequently draw comparisons between financial products and cryptocurrencies when evaluating how to manage cryptocurrency risks best. However, there are at least seven unique problems that risk managers must be aware of when dealing with cryptocurrencies.

1. Variety

The first issue that risk managers must deal with is that cryptocurrencies are fundamentally different and not interchangeable. Furthermore, the confusing array of cryptocurrencies differs in various ways, most notably in terms of security, programmability, and governance. There is no such thing as a “cheapest-to-deliver” coin. As a result, when calculating, controlling, and monitoring risks, one must consider the varied aspects of different cryptocurrencies.

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 and gold. ETH- the second most actively traded cryptocurrency, adds more complicated, self-executing “smart contract” features to BTC’s fundamental functionality, allowing users to digitally recreate complex financial instruments, transactions, and performance contracts. Furthermore, ETH has been utilized to launch exchanges.

Cryptocurrencies like stablecoins, whose value is pegged to fiat currency, add to the complication (such as USD). By converting national currencies into non-stable cryptocurrencies, these digital assets give a fixed exchange rate. The nuances involved with the issuance and control of cryptocurrencies further complicate the picture. For example, cryptocurrency issuers and users share transaction tracking and validation obligations.

2. Safety

The main issue in the crypto sector is a lack of security. Indeed, with hackings and data breaches frequently making the news, users expect more excellent protection for their assets and data. However, it’s vital to remember that as technology advances, so do hacker capabilities. Because exchanges are so vulnerable to hacking because they centralize the risk, increasing decentralization may be a viable solution to search for optimum security.

Security is a serious and pressing issue. According to Coin Desk, $2.7 million is stolen from exchanges every day. In addition, the amount of bitcoin stolen in 2018 increased 13 times over the previous year. Every day, $2.7 million in crypto assets are stolen, equating to $1,860 each minute.

3. Valuation Troubles

Assessing and determining a financial instrument’s exposure using established market-wide standards is one of the first steps in managing its risk. On the other hand, cryptocurrencies are unique. There are no consensus valuation techniques, widely acknowledged measures, and published pricing information might vary significantly between sites. To estimate a reasonable value for a coin, risk managers must comprehend the widespread usage of complex and sometimes competing valuation procedures.

From a functional standpoint, some analysts approach the value problem by treating cryptocurrencies as currency in circulation – or fiat money like the USD or EUR. However, this strategy is based on a faulty premise that appropriately glosses over significant legal differences between cryptocurrency and other financial instruments. Cryptocurrencies, in particular, are not lawful money, do not have legal protections or implicit or explicit government backing, and cannot be used to settle transactions with certainty.

Unlike financial products, cryptocurrencies are not regulated and do not have legal protection as traded financial instruments. This generates a tangle of legal risks and uncertainties, significantly influencing digital asset investability and risk management.

There is yet to exist any global consensus on how cryptocurrencies should be governed, especially product creation and trade. The government’s positions have been uneven and, at times, unstable. Some nations have outlawed the design, sale, ownership, and exchange of specific cryptocurrencies while allowing and encouraging the proliferation of others.

Other countries are working on regulatory requirements for issuance, trading, reporting, and transparency that are more forward-thinking and comprehensive. Governments are accidentally constructing islands with rudimentary legal protection in an ocean of unregulated cryptocurrencies because these norms apply only within one jurisdiction. For some, this essential legal protection offers an opportunity to explore the possibilities of cryptocurrencies. Unfortunately, for others, the lack of universal regulation maintains the legal, compliance, and regulatory issues that have hampered the progress of digital assets.

5. Reliability

Initial Coin Offerings (ICOs) is an excellent way to attract investors, but some of them have turned out to be scams. Therefore, exchanges must be cautious and severe in listing just those crypto coins that are trustworthy, as well as ensuring that the proper assessment is carried out.

6. Trading Fees

Some exchanges levy a single flat fee on all trades, such as 0.2 percent of the transaction value. However, many exchange platforms divide their trading fees into two categories: maker and taker fees.

Maker costs can be higher than taker fees in some situations because the maker contributes liquidity to the market, and the exchange ‘rewards’ the trader for doing so.

7. Liquidity

Liquidity is a critical component of any market. When there is a dearth of it, the atmosphere becomes unbalanced, and things spiral out of control. Orders are not made on time due to the lack of liquidity, leaving the door open for significant holders to manipulate prices. As a result, markets become volatile, and price slippages occur due to a lack of liquidity.

Reduced liquidity has a secondary effect of consolidating power in the hands of bitcoin exchanges with high liquidity. Token listings on several significant exchanges now cost up to $1 million, effectively selling liquidity to token projects.

Bottom Line

Cryptocurrencies have quietly gained traction as an asset class over the last decade. They are currently attracting an increasing number of institutional investors. The increased demand necessitates a more thorough examination of the underlying causes of risks and opportunities. The requests for enhanced risk management are part of the market’s maturing process. This growth will eventually include, among other things, the replacement of self-regulation and automated governance with effective supervisory and regulatory frameworks. It is yet to be discovered if cryptocurrencies will eventually supplant fiat money to some extent. But one thing is sure: the path to a digital currency requires a set of criteria that is clear, comprehensive, and worldwide. Risk managers must be aware of the hazards specific to this new asset class.