Exchanging Cryptoassets: An Overview of Market Dynamics and More

• Complexity of cryptoasset investment: Understanding the differences between cryptoassets and traditional financial instruments (such as shares, bonds, or derivatives) is crucial. Unlike financial instruments, tokens often lack a unified regulatory framework, making them potentially riskier investments: first because the regulatory framework is not evenly developed in all jurisdictions, which leads to various levels of requirements and consumer protection. Second because unlike financial instruments, the rights attached to cryptoassets are defined by the crypto issuer and not by the law, which usually means cryptoassets grant fewer rights and their value is more difficult to evaluate.
• Differences between cryptoassets and traditional shares: Cryptoassets and traditional shares differ significantly, particularly in the rights they grant to investors. The rights attached to cryptoassets are defined by the project issuing the cryptoassets rather than by standard legal frameworks. Shares typically give right to a vote and a dividend, where most cryptoassets are “utility tokens”, meaning that they do not carry any governance or financial right, but access to features, services, or applications. 
• Volatility in crypto vs. financial instruments: Cryptoassets generally experience higher volatility compared to traditional financial instruments due to the lack of maturity of the crypto industry, the difference in rights attached to the cryptoassets and the functioning of the crypto market (no opening/closing times, global market). This increased volatility can offer a higher return but also carries  significantly higher risks for investors.
• Regulatory differences in crypto and traditional finance: The regulatory framework governing cryptoassets is often less stringent than that of traditional financial instruments. Even though the regulation evolves towards harmonisation (at the European level in particular), regulations are frequently still fragmented at national level, contrary to traditional finance. This difference highlights the unique challenges and risks associated with investing in crypto (no alignment between various countries, different levels of consumer protection, etc).

• Risks beyond financial loss in crypto investments: Investing in cryptoassets involves not only financial risks but also heightened exposure to hacking and financial crimes. This aspect underscores the importance of robust security measures.
• Securing the users’ assets: Some experts advise using cold storage for most crypto assets to protect against online threats and unauthorized access. However, other advanced security measures have emerged in recent years, such as those employed by SwissBorg. Learn more SwissBorg’s compliance and security measures here.
• Ensuring operational security: Regular security audits and vulnerability assessments are critical operational practices for the security of trading platforms. These practices help trading platforms in identifying and addressing potential security threats.
• Insolvency risk: Investing in cryptoassets through a third-party (for example, a trading platform) exposes you to some risks in case of insolvency or hack of the platform. If such an event happens, it is possible that your assets cannot be redeemed from the trading platform. 
• Mitigating operational and insolvency risks: To mitigate these risks, entities providing cryptoasset services shall ensure operational transparency and conduct regular audits of their finances. These measures are effective to protect the entity from operational and insolvency risks, thus, to protect the users’ funds.
• Assets segregation: To safeguard investor assets against operational and insolvency risks, it is crucial for cryptoasset service providers to keep users’ funds separate from their own. This measure provides an essential layer of security. You should carefully read the Terms and Conditions of the cryptoasset service provider you intend to invest through in order to verify that asset segregation is implemented. 

• Regulatory requirements for cryptoasset investments: Cryptoasset services providers have to comply with various requirements, depending on the service(s) they provide (for example, custody, exchange, etc) and the jurisdiction(s) where they operate. These regulations aim to protect retail investors from the inherent risks associated with crypto investments. Cryptoasset investments generally involve providing custody and exchange services. Cryptoasset exchanges are required to comply with stringent regulatory measures, including Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols. These measures are essential for safeguarding consumers against fraud and other financial risks. With the entry into application of the EU MiCA regulation by the end of 2024, cryptoasset exchanges will have to implement additional requirements to ensure consumer protection, fair treatment, transparency and internal controls.
• Investment advice and regulatory compliance: Amongst the services that can be offered to clients by regulated entities, are cryptoasset portfolio management and investment advice. An entity needs to be authorised to provide such services before offering it to clients, and most entities that provide advice are currently operating outside a regulated status.  SwissBorg, for example, is not yet authorised to provide investment advice to its users, which is why we are not offering any type of advice. This restriction underscores how important is it that you carry out your own research and due diligences before investing.

• Best execution in trading: "Best execution" refers to the obligation of trading platforms to execute trades on behalf of their clients under the most favourable terms possible. This concept ensures fair and efficient market practices.
• Impact of liquidity on trade execution: The daily traded volume, or liquidity, significantly affects trade execution on crypto exchanges. Lower liquidity may lead to substantial impacts on the market price when large orders are executed.
• Factors impacting market liquidity: Market liquidity on crypto trading platforms can be directly influenced by a sudden increase in trading volume. High trading activity typically boosts liquidity, facilitating smoother trade execution. The liquidity of a cryptoasset is generally depending on its maturity but can also rely on the general trend.
• Business outages in crypto exchange platforms: Technical issues that block or limit access to trading platforms are a prime example of business outages. These outages can have significant impacts on trading activities and investor confidence.

• Managing portfolio and reacting to losses: Diversification is key to managing a crypto investment portfolio and mitigating risks associated with market volatility. Not putting all your eggs in the same basket is an essential rule for any type of investing, and it becomes even more relevant when managing high risk investments such as cryptoassets. 
• Responding to Market Downturns in Crypto In the face of market downturns, investors should conduct an in-depth analysis of market trends. This involves considering a shift towards assets with greater resilience and evaluating the inclusion of non-crypto assets for a more balanced portfolio. Retaining exposure to high-risk assets during market downturns could lead to increased financial risks. 

• Evaluating exchange platforms: When assessing whether a trading platform would be suitable for you, you should verify that it ensures adherence to local regulations and consumer protection standards. This assessment helps to identify reliable and legally compliant platforms.
• Supporting responsible trading on platforms: Crypto trading platforms should support responsible trading by providing access to historical data for analysis, enabling informed decision-making by traders. This approach helps in promoting transparency and educated investment choices.
• Recourse for loss of funds: If an investor is a victim of fund loss, they may contact the support desk of the company or file a complaint with the regulator. However, it is important for you to understand that the regulation does not protect you from losing funds due to market volatility. Filing a complaint with a financial ombudsman will only give you the right to file a complaint against a cryptoasset service provider if such provider has been acting fraudulently or carelessly. Events not attributable to the cryptoasset service provider will not entitle you to any recovery rights.

Conclusion: Navigating the world of cryptoasset investments involves understanding a myriad of factors, from regulatory compliance and security measures to the intricacies of market liquidity and investment risk. Investors must be vigilant, informed, and proactive in their approach to engage successfully in this dynamic and evolving landscape.