Any investment is risky. Usually, the higher the returns the riskier the proposition, and since my strategy showed some promising returns it is worth thinking about where exactly the risks are.
Bitcoins could tank
The first risk is pretty self explanatory. Since I am buying bitcoins whenever the price drops, a large drop would lead to me putting all the money on bitcoins. If the price continued to fall, the portfolio would be wiped out.
This is something that is hard to avoid when investing in any asset. I am thinking about implementing some stop-loss features to minimize the damage, though.
The bitcoin price could explode
If on the other hand the price of bitcoins skyrockets, my strategy would be left holding fiat and therefore not participate in an extraordinary rise. This is not really a risk in the strong sense as it would not decrease the value of the portfolio, but should be noted nonetheless. In effect, the strategy does well when there is a good deal of volatility without too much of a general trend (as was the case in January 2014, for example). In case the bitcoin price really increases by orders of magnitude, no trading strategy will beat a buy and hold strategy.
The exchange could go under
It has happened before and it will happen again - exchanges will go bust or make off with their customer's deposits. I am currently trading via Kraken, a US based digital asset exchange. It is hard to quantify the risk of a particular exchange going under, although I constantly keep track of all news and rumours. In order to mitigate this risk, I am planning on adding other exchanges (bitstamp and/or bitfinex) in order to minimize this risk. Such a diversification also has the advantage of being able to do some arbitrage if prices between the exchanges start to differ.
Bugs in my code
All code has been written by me and although It has been extensively tested (both on dummy data and in a live environment using my own money for trading) there might be some bugs which could cause the program to trade unfavourably. Looking at the track record, and since the behaviour of buys and sells is tracked constantly, I am very certain that no such bugs exist in the current code.