Ten years after the first cryptocurrency was launched, thousands more have filled the scene. Today, they are a digital asset class that either confounds or fascinates many. The latter makes them an attractive investment option – and indeed, many have become rich from trading in cryptos.
However, the crypto world can prove murky. Thanks to some of their inherent characteristics like being intangible, decentralized, and incredibly volatile, cryptocurrencies are fallible to unique risks that anyone hoping to interact with them should be aware of.
In this article, we explore some of these risks so you can stay safe while interacting with this digital asset class.
The Future is Uncertain
Cryptocurrencies are known for their wild and unpredictable down and upswings. The crypto market is thus an unstable market marked by speculation and uncertainty. Trading in cryptocurrencies could set you up for huge losses – or huge profits, depending on market events. Consider, for example, how Bitcoin achieved a high of $20,000 in 2017 – from a paltry $700 at the beginning of the year. And as of November 2019, it’s trading at $7617. All these figures are nowhere near stable or predictable.
And in 2018, the total market capitalization of cryptos fell from a massive $183 billion to a low of $100 billion.
These fluctuations mean you shouldn’t rush all in to invest in cryptocurrencies – especially with money you can’t afford to lose. The same applies to transactions in crypto. Let’s say you’re purchasing something expensive with crypto. What if the price drops before you close the deal? You will have to fork out more crypto than you had planned for. The takeaway is: practice due diligence before trading in, or transacting with cryptocurrencies.
Governments, businesses, and institutions are yet to fully embrace cryptocurrencies. Some businesses are wary of the currency due to its history of instability. They are thus reluctant to accept it as a means of payment.
What’s more, many governments around the world are either openly hostile towards it or just plain indifferent. As a result, people and businesses are ambivalent or outright mistrust it.
For example, China has long banned banks from engaging in any activity that encourages the survival of cryptocurrency in the country. And in other countries such as Russia, using crypto to pay for things is illegal.
The Entry Is Wide, But the Exit Is Narrow
Since Bitcoin successfully busted on the scene, it’s become almost impossible to keep up with every other cryptocurrency that gets introduced virtually every week. As of now, the number is nearing 3,000. There is a low barrier for entry for cryptos – which creates a wide entry for new ones to enter the market.
However, most of these coins start with a frenzy and end up fizzling out, or devaluing. People that rushed in to invest in these cryptos are left stuck with valueless coins in their hands, with no one willing to buy them.
Extortion and Manipulation
Cryptocurrencies are a very appealing asset class – thanks to their sophisticated technology and the potential to make you rich under the right conditions. For this very reason, they are susceptible to all manner of social engineering and fake news such as fear, doubt, and uncertainty.
Crypto beginners, along with the naïve, can easily become prey to these tricks, misinformation, cyber fraud, market manipulation, and other risks.
Another area of extortion is Initial Coin Offerings. Some cryptocurrency projects have run away with investor money after these sale events.
Hype and Noise
There’s a lot of noise surrounding cryptocurrencies. From social media to news headlines to crypto forums, everyone is now ‘expert.’
A lot of people buy into the noise instead of doing their own research. What if prices crash when you’ve put substantial money into an overhyped cryptocurrency? The cryptocurrency market can give you handsome returns – but only after you make informed bets backed by research and patience.
Theft Hovers Above
Stories abound of crypto hacks that led to substantial losses. The crypto community is still reeling after the massive hack of 850,000 bitcoins from Mt.Gox – which led to the exchange closing shop and filing for bankruptcy. Another case is when hackers made away with 7,000 bitcoins from Binance.
These are only examples of the hack all too familiar in the cryptocurrency industry. If you have crypto holdings, they are always prone to hacking, phishing, stealing, or other ill-intentioned activity. Passwords can be stolen or hacked. Your hardware wallet can be corrupted or stolen. For this, it’s vital to employ extra caution when dealing with cryptocurrency.
‘Man is to error’ is true with cryptocurrencies. Thanks to their intangible nature, a simple thing as forgetting your password could lead to a loss in crypto funds. Losing hardware, spilling a drink on your paper wallet, transposing numbers, etc. are enough to create losses. Think of an exchange taking place, and you enter the wrong public key. You could lose thousands of crypto.
The computational complexities and high energy consumption associated with some cryptocurrencies such as Bitcoin are also their limitations. Although Bitcoin and some mainstream cryptocurrencies have proven resilient, such aspects could backfire on others.
Also, the decentralization of genuine blockchains cushions them against certain risks, like having a single point of failure. However, not all cryptocurrencies are truly decentralized as they claim. For this, investors should be on the lookout for cryptocurrency projects that claim to be decentralized, yet are really not.
Forking is a specter that’s always hanging over some cryptocurrencies. This can lead to a loss of confidence in the market and cause price falls. Forks can also erode market share, valuation, and interfere with the adoption of crypto.
Forking can also lead to factions – with one supporting the original currency and other supporting the fork, as was observed with Bitcoin and Bitcoin Cash in 2017. This may significantly erode trust in either currency.
Cryptocurrencies have made an indelible print on the world already – and they’re here to stay. Investing in cryptocurrencies can make you a fortune but under the right conditions. The first thing is to understand the perils associated with them before you start using them. Before you dip your toes into the murky waters of cryptocurrency, we hope this list of ‘crypto risks’ will be your lighthouse.