In the world of finance, risk is usually defined as the possibility that the actual gains on an investment will differ from the expected results or returns.
Risk also includes the possibility of losing part or all of an original investment.
It is very important to understand that there are many different types of risk (both financial and non-financial) and that certain kinds of risk are especially relevant to anyone holding, buying or selling cryptocurrencies.
We identified some of the main drivers of cryptocurrency risk relevant to our customers and explain them in some more detail below.
The main drivers of risk related to cryptocurrencies
High Volatility
One of the major risks involved in the trading of (or investing in) cryptocurrencies results from the extreme volatility of many coins.
As was widely reported in the media, cryptocurrencies like Bitcoin (BTC) can show extreme levels of volatility. At times, changes in value of a few 100 percentage points (or even more) have occurred.
While it is true that almost any asset can gain or lose in value, cryptocurrencies have experienced value changes on a scale that can rightly be called extraordinary.
At Brighty, we only utilize stablecoins (such as USDC, USDT or EURT) which are pegged to legal tender (officially recognized currencies like USD or EUR), essentially taking the "high volatility risk" out of the equation.
Note: it is important to keep in mind that only reserve-backed stablecoins (like the ones used in Brighty's Earning Vaults) are currently considered "stable" in the sense of staying close (or equal) to the value of the currency (or other asset) they are pegged to.
So-called "algorithmic stablecoins" (more about them here) are considered significantly more volatile.
Complex products
Another major driver of risk is the reliance on highly complex, sometimes very unreliable financial models as the basis of cryptocurrency products. A related type of risk is the reliance on uncertain (cryptocurrency) business models.
A large number of companies offering cryptocurrency-based products or services market them as great ways of generating significant returns within a very short period of time.
What they often do not communicate though is, that their products or services tend to be highly complex. This complexity tends to make it very difficult to properly gauge the risks involved - even for financial analysts and other experts.
At Brighty, we believe that the products on offer should be as simple and straightforward as possible. Customers should be able to understand the product (or service) and should not be forced to put up with over-the-top jargon, impossibly complicated equations or anything else that (primarily) serves to bedazzle.
That is why our Earning Vaults are designed in a manner that makes them simple and easy to understand.
Lack of compliance
Compliance issues are another major source of risk when it comes to cryptocurrencies.
In regard to this type of risk, one has to consider that, in many parts of the world, there is still no proper regulation (and oversight). This not only leads to confusion about what is and what is not allowed but also seems to entice some companies to consciously neglect compliance.
This lack of compliance is part of the reason for the recent number of high-profile lawsuits and criminal investigations. It also appears to be the main cause behind some of the largest fraud cases involving cryptocurrencies in the last few years (more about that below, under problematic conduct).
At Brighty, compliance is one of our top priorities - which is why we have chosen to open our headquarters in Switzerland, one of the strictest, most thorough jurisdictions in the world.
It is also the reason why we have assembled a team of legal experts to ensure our internal compliance policies and procedures are among the best industry.
Problematic conduct
Another major driver of risk, specifically, of non-financial risk related to cryptocurrencies has to do with the highly problematic (and even criminal) behaviour of some of the companies active in the industry. Well-known cases like the collapse of FTX, the scandal involving Terra and numerous smaller but nonetheless highly damaging examples of dishonest, negligent or outright illegal conduct illustrate that.
At Brighty, we take the fight against unethical or outright illegal behaviour very seriously.
Through the enforcement of a strict and sophisticated code of conduct, in conjunction with robust internal safety mechanisms, we ensure that the conduct of our employees is not only in line with legal requirements but is based on the principles of honesty, transparency, integrity and reliability.