Investing in cryptocurrency comes with great rewards, but along with it are bigger risks as well. This is one of the things that would-be investors need to take note of before they put their money on this type of asset. Knowing the many risks that come with cryptocurrencies can help them decide how much they want to allocate to digital coins and the preventive measures they need to take before committing their money to endeavors involving Bitcoins or altcoins.
Here are the top 10 risks that people need to be aware of before investing their money in cryptocurrency.
Online Scams and Frauds
Many people have discovered cryptocurrencies in the past year, and the increased demand for the tools to trade or mine digital currencies has caught the attention of scammers and fraudsters. These people target inexperienced traders and set up fake crypto wallets and trading apps that download malware to their unsuspecting victim’s device. Some people connect with new traders to buy or sell currencies, then disappear once they get the victim’s assets.
Investors can avoid losing their coins to these individuals by examining each cryptocurrency tool that they come across before using it. Trustworthy tools are connected to the official page of the currency. If you’re looking for a legitimate Monero wallet, for example, make sure that your options are linked to the currency’s website. It’s also a good idea to check out crypto-related safety strategies now and then to make sure you’re updated about the latest attempts to steal from legitimate traders and holders.
High Level of Volatility
Compared to more traditional assets, cryptocurrencies have higher levels of volatility. The prices of currencies can change significantly in a very short time, and it’s not uncommon for currency units to drop in price by the hundreds or thousands within a day. At the same time, some blockchain networks require hours before they can complete transactions. If you’re thinking of trading actively, use this information to your advantage by making timely decisions and being cognizant of the factors that can affect the price of your preferred digital coinage.
Cryptocurrencies are fairly new, and some laws and regulations have not caught up with the technologies that digital currencies use. As such, people who invest in these assets often cannot count on the backing and support of law enforcers in case they become victims of financial crime.
Susceptibility to Errors
Technical glitches can occur, even within blockchain networks backed by an active community of cryptography and tech enthusiasts. Aside from technical errors, would-be crypto investors should also be wary of human errors preventing them from accessing their assets. Some users have accidentally thrown away their physical wallets or lost their keys, for example. It’s wise to anticipate these errors and have safety devices in place to prevent them from happening.
Forks and Discontinuations
At times, the team behind a blockchain network can have disagreements about the basic rules that govern a currency’s existence or the direction that the community should take in the future. If they are unable to reach a consensus, forks or network splits can take place, and this can lead to the existence of alternative chains. Some alternative chains survive and do well on their own, but most of these eventually turn into dead coins.
Security Breaches and Seizures
Some cryptography tools also fall victim to financial criminals due to their weak security systems. Hackers can take advantage of these security weaknesses and steal the coins stored or traded in their target platform. Still, countries like China ban cryptocurrency-based transactions and enact plans to eliminate crypto mining and trading activities within their jurisdiction. This can lead to seizures and the loss of digital coins among users.
Property Class and Legal Considerations
Cryptocurrencies exist in a gray area, as some government agencies and organizations still cannot agree on how the asset should be classified. This can make it difficult for digital coin users to determine whether or not they should pay taxes on their profits or how they can use their coins without breaking existing rules.
Business Registration and Use
Some businesses trade and pay salaries in the form of cryptocurrencies. However, their capability to do this legally is entirely dependent on the regulatory bodies that govern their operations. At times, they may only need to fill out forms to use cryptocurrencies in their business, but there are also instances when companies have to do their research on their own and coordinate closely with their regulators.
Exchanges Located Outside the Country
Crypto exchanges are located worldwide, which can make it difficult for traders and users to go after these companies in case they encounter problems while trading. If the exchange has good customer service, then you have a chance of resolving the issues you’ve encountered. If not, you can perhaps resort to calling out the exchange in public to draw attention to your problem, but this doesn’t always mean that you’ll receive a favorable or even helpful response.
The decentralized status of cryptocurrencies is a double-edged sword. While users are not beholden to the government and financial institutions while using their digital coins, they also can’t depend on these establishments to have their backs when they run into trouble.
All types of investments, even more traditional ones like real property and stocks, come with their respective set of risks. It’s the investors’ responsibility to know exactly what they are getting into before committing to using their money. If you’re a would-be crypto investor, make sure to do your due diligence so that you can control any possible losses while improving your chances of making a profit.