Cryptocurrencies have exploded in popularity over the past decade, and almost everyone is talking about or investing in them. However, cryptocurrency investments are unlike any other in the financial system. They defy conventional investment trends and are subject to ridiculous fluctuations.
There are over 10,000 cryptocurrencies and a host of cryptocurrency exchanges with more being added daily. That’s a lot to take, especially for new investors. This article will go over the biggest risks new and experienced investors should be aware of in this extremely volatile market.
The 9 biggest risks for crypto investors
Unlike physical money (or fiat), cryptocurrencies are not backed by banks or governments and are highly speculative. Cryptocurrency transactions exist as digital inputs on a blockchain. Cryptocurrencies are a reliable and secure system due to the public ledger system.
While blockchain can contribute to the security of crypto, the decentralized nature of cryptocurrency, combined with the anonymity it offers, comes with risks. Here are ten important risks associated with investing in cryptocurrency:
Volatility is one of the most basic indicators of an asset’s financial health, and cryptocurrencies are one of the most volatile investment options.
At the start of 2021, Dogecoin had risen by over 20,000%, but by May 2021 it had lost more than a third of its value. Wild speculation on the future of cryptocurrency has driven the price up, both up and down.
Speculation is fueling the cryptocurrency market, with some investors quickly buying and selling their holdings as soon as there is a sign of falling prices. A single negative popular tweet or news report about a cryptocurrency could cause its price to drop quickly.
Still, there are signs that the crypto market is rallying in terms of volatility. Major trading and investment firms have recently acquired significant stakes in most cryptocurrencies. These cryptos can begin to exhibit healthy volatility thanks to the stabilizing influence of these large companies.
2. Cybervol and hacking
Cryptocurrencies are held in digital wallets and traded through digital currency exchanges. Cryptocurrencies are particularly attractive to cybercriminals due to their online addiction and anonymity. To gain access to cryptocurrency wallets and trading platforms, criminals use various phishing attacks.
Individuals and businesses wishing to invest in cryptocurrency must adhere to strict internet security protocols to protect their assets. Being on top of the latest threats is also helpful, as is understanding how to protect your crypto assets and crypto wallets.
The lack of central authority is arguably one of the most attractive features of cryptocurrency.
But, this absence has its drawbacks, especially when the going gets tough. For example, in most online financial transactions, electronic money transfer is usually supported and mediated by a financial institution. So if there is any problem with the transaction, you can easily contact them and resolve it.
With a cryptocurrency transaction, this is not possible. Its decentralized nature makes it difficult to identify the right entity with which to file a transaction dispute. As a result, most cryptocurrency investors are advised to trade through reputable digital currency exchanges.
Majority of the major exchanges have great customer service that can help you resolve almost any issue. Yet the decentralized nature of most cryptocurrencies makes dispute resolution nearly impossible.
4. Risks associated with peer-to-peer transactions
A peer-to-peer (P2P) platform is a cryptocurrency marketplace that directly connects crypto buyers and sellers. On a P2P exchange, any cryptocurrency transaction is paid directly between the two parties.
These exchanges are one of the easiest ways to convert cryptocurrency into fiat currency. Yet the human factor is where mistakes or neglect can lead to the loss of your assets. In addition, there is always a risk of scams and fraudulent schemes, such as a buyer refusing to pay for the cryptocurrencies received or a seller refusing to send the tokens etc.
Finding a P2P platform that provides digital asset escrow service is the best way to avoid most of these schemes. Cryptocurrencies are held by the platform during the transaction using this service. The asset will be released to the buyer as soon as the buyer completes the payment process and the seller confirms receipt. This ensures that both parties get what they want. In case of disagreement, a representative of the platform will resolve it.
5. Loss or destruction of private keys
Cryptocurrencies are built on a crypto system that uses key pairs to authenticate transactions. One is a public key accessible to the public and the other is a private key kept secret and used for identification and authentication. A private key is automatically generated when you open a crypto wallet and grants the user ownership of the funds in that wallet.
Losing a private wallet key means losing control or access to all cryptocurrencies in that wallet. In fact, around 20% of all Bitcoin lost is due to the loss or destruction of private keys. It is therefore crucial that you regularly back up your private keys, preferably on a secure and isolated computer. Additionally, never store your private key online, especially if it is not in an encrypted format.
6. Unregulated trading platforms / exchanges
The popularity of cryptocurrencies has led to an increase in the number of cryptocurrency exchanges and trading platforms. As a result, choosing an exchange has become more difficult. Cryptocurrency exchanges offer the same level of services to the financial market as traditional financial institutions.
However, the lack of regulatory oversight has contributed to the growth of scam exchanges and market manipulation in crypto trading. Some trading exchanges have exorbitant trading fees and no policies to prevent manipulative or suspicious transactions, while completely unregulated exchanges may use predatory practices.
Exchanges can charge exorbitant commissions while making withdrawals nearly impossible. Others may have weak security, making it easy for crooks to steal your money.
The best approach is to find trading platforms and exchanges with reputable security and worthy reviews. Always read the fine print of their terms of service and avoid platforms with unrealistic claims.
7. Regional regulations
Regulation is one of the most serious threats to the continued growth of cryptocurrency. Governments around the world have promulgated regulations to limit the use of cryptocurrencies in their respective countries. Many governments view cryptocurrencies as a way to bypass financial regulations and facilitate money laundering.
At the moment, most governments are researching how to integrate cryptocurrencies with their existing fiat currencies. Others, like El Salvador, have fully embraced cryptocurrencies, with some launching or even considering launching a national cryptocurrency. Still, there is a high risk of legislation restricting the use of cryptocurrency.
8. Currency conversion risks
Crypto prices fluctuate frequently, making them a high risk investment. For example, Bitcoin jumped from $ 20,000 in December 2020 to over $ 65,000 in April 2021, before dropping to around $ 28,000 in June 2021. You would have made a significant profit if you had bought Bitcoin in January and l ‘had sold at the end of April. Holding your Bitcoin assets for a few days would have resulted in a significant loss of dollar value.
Since most cryptocurrencies are volatile, their value fluctuates against traditional currencies. Additionally, since cryptocurrencies are speculative, investors are at the mercy of the value they have at the time of sale.
9. Tax laws
Cryptocurrencies are classified as fixed assets, which means they are subject to the same tax regulations as stocks. According to the IRS, when you use cryptocurrency to purchase goods and services or exchange it for other currencies, you are subject to capital gains tax. In addition, any cryptocurrency obtained through mining is taxable.
Cryptocurrency investors are required to report their earnings as income on their tax returns. However, not all cryptocurrency transactions are taxable. The purchase of cryptocurrencies, their storage and their transfer between exchanges or wallets are all exempt. Cryptocurrency laws can be complicated, but you can get up to speed by reading the IRS guidelines on virtual currency.
The bottom line
Investing in cryptocurrency is extremely risky and you need to be prepared for any eventuality. It’s the Wild West, and due to its decentralized and unregulated nature, it’s full of crooks and con artists. Inexperienced investors should only invest what they can afford to lose without suffering serious consequences.
Are you about to get started in cryptocurrency? Stop! Be sure to do your research before parting with your hard earned cash.
About the Author