Opinion

Navigating Risks and Rewards in the World of Digital Assets (Part II)

Continuing from our previous columns about crypto assets, their risk and rewards:

Beyond the internal considerations, crypto businesses must also factor in market dynamics to effectively manage risks. In the KPMG’s Technology Risk Insights there are 4 main areas of concern listed:

Public network implications:

The dynamics of the crypto market are intricately intertwined with the underlying public networks that power these digital assets. Changes in liquidity, transaction fees, and on-chain events can exert significant influence over the valuation and trading patterns of various cryptocurrencies. As market participants strive to optimize their trading strategies, the ability to monitor network activity emerges as a pivotal factor. By closely observing network metrics and trends, traders and businesses can make informed decisions, anticipate market shifts, and strategically position themselves to leverage favorable conditions. Thus, the monitoring of public network implications transcends being merely important; it evolves into a fundamental practice for participants seeking to harness the volatile yet promising realm of crypto trading.

Counterparty risk:

Within the intricate ecosystem of crypto trading, the concept of counterparty risk assumes paramount importance. This risk encapsulates vulnerabilities emanating from trading infrastructure and the custody of private keys. To ensure the integrity of transactions and the security of assets, the conventional practice of diversification is heightened. Alongside this, due diligence emerges as an essential checkpoint. Through rigorous examination and evaluation of counterparties, trading partners, and platforms, market participants can mitigate the risks associated with faulty infrastructure or compromised security. Moreover, the adoption of multi-signature transaction requirements adds an extra layer of protection, requiring multiple cryptographic signatures for transaction approval. By diligently addressing counterparty risk, traders and businesses establish a fortified foundation that safeguards their involvement in the dynamic crypto landscape.

Asset volatility:

Volatility stands as an inherent characteristic of crypto assets, presenting both opportunities and challenges for market participants. The value of cryptocurrencies can experience rapid fluctuations triggered by a multitude of factors, including external events, on-chain developments, and the whims of noise traders. By maintaining a skilled team equipped with comprehensive market insights, trading strategies can be adjusted swiftly in response to unexpected fluctuations, minimizing potential losses and capitalizing on favorable market movements. Additionally, the strategic deployment of algorithmic trading plays a crucial role in managing asset volatility. Automation algorithms are programmed to execute trades based on predefined criteria, ensuring swift responses to market changes and reducing the impact of emotional decision-making. In the realm of crypto, the capacity to manage and exploit asset volatility becomes an indispensable skill for those aiming to thrive in this dynamic environment.

Global nature of crypto:

The decentralized and borderless nature of cryptocurrencies results in a 24/7 global market that operates without interruption. This constant activity presents both opportunities and challenges for market participants. To effectively maximize gains and manage risks, market players must allocate sufficient resources to sustain operations around the clock. This not only encompasses human resources but also technological infrastructure capable of handling the demands of continuous trading and market monitoring. The global reach of cryptocurrencies necessitates thorough jurisdictional due diligence. Regulatory climates can vary significantly from one country to another, and understanding these nuances is crucial for compliant and risk-mitigated trading activities. Market participants must meticulously assess regulatory frameworks, compliance obligations, and potential country-specific risks to establish a resilient presence in the global crypto market.