The following are the seven unique challenges that risk managers should be familiar with when dealing with cryptocurrencies.
- Diverse and Irreplaceable – The first issue that risk managers must deal with is the fact that cryptos are qualitatively dissimilar and non-replaceable. The confusing array of cryptos varies in a variety of ways, most notably in terms of protection, programmability, and management. In other words, there is no such thing as an affordable-to-supply cryptocurrency. As a result, when calculating, governing, and supervising risks, one must take into account the various discrepancies in traits over cryptocurrencies.
- Difficult to Evaluate for Risk Management – One of the first measures in handling any financial instrument’s risk is to evaluate and decide its vulnerability with the help of standard market-wide approaches. However, in the case of cryptocurrencies there is neither a consensus valuation method, nor widely recognized metrics, and stated costing information can vary significantly between locations.
So, to decide a sensible worth for a digital currency, risk managers have to understand the extensive
use of complicated and sometimes unstable evaluation methods.
- Non-Regulation and Legal Stumbling Blocks – Distinct from other financial instruments, digital currencies are not governed products and do not enjoy the same level of legal safety as traded financial instruments. This creates a tangle of lawful risks and doubtfulness, which can have a significant impact on the investability and management of the risk of digital assets.
- Inadequate Transaction Data – Risk managers may lack the data, which they require to model upcoming cryptocurrency vulnerabilities and risks. In addition to that, a lack of transaction data makes it difficult to calculate basic evaluation metrics like strain experimentation, value at risk, and ES.
- Less Liquidity and Overpriced- In comparison to typical markets, the cryptocurrency market usually has less liquidity and is high-priced. As several cryptocurrencies’ supply is restricted, with the latest units issued on a pre-determined schedule, it is no wonder that the greater instability of cryptocurrency value has been influenced by liquidity. Restricted liquidity and greater instability are likely to continue to plague cryptocurrency markets, making powerful value identification a difficult task. Furthermore, gapping will remain an issue in these markets, limiting investors’ ability to leave their digital currency positions.
- Issues with Custody, Clearing, and Settlement – Cryptocurrency custody solutions are lawfully and technically complicated. The use of public- and private-key cryptography to follow and validate dealings cryptographically contributes to the complication.
The lack of a collective pattern for clearance and settlement of digital currency transactions further
complicates the circumstances, displaying traders to significant counter-agent credit risks.
- Risky Cryptocurrency Derivatives – The popularity of crypto futures trading is growing among investors and dealers. Distinct from financial instruments or goods derivatives, these digital currency derivatives are typically utilized to enhance vulnerability rather than mitigate risk.
It remains to be observed whether digital currencies will ultimately substitute fiat currency to a certain extent. However, an obvious, extensive and global set of principles is needed on the path to a cryptocurrency. It is recommended that risk managers should be extra careful regarding the risks that are specific to this new asset class