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Crypto Guides

Knowing The Risks Involved While Using & Investing In Cryptocurrency

Introduction

Bitcoin, being the world’s largest virtual currency in terms of market cap, is aiming to give the financial space a new look. Also, blockchain technology, which is digital, distributed, and decentralized, has been powering transactions without the existence of intermediaries. With these features, it is believed to be a game-changer for the financial industry in the near future. However, apart from its primary features, it is essential to have a light on the risks involved in them.

Potential Risks Involved In Using Cryptos

Yet, cryptos have been the evolved way to look at currencies; there are ever-growing risks and concerns. Here are some reasons which show that using and investing in cryptocurrencies might not be a smart step.

Unavailability of traditional fundamental metrics

Cryptocurrencies lack the existence of fundamental metrics, which is useful for assigning value to an asset. In a stock, investors can get info about balance sheets, income statements, earnings reports, and many other fundamental factors to analyze a stock. However, with cryptocurrencies, there are no fundamental metrics that can be used by investors. Apart from processing speed and average daily transactions, the investors virtually get nothing about the power of digital currencies needed to analyze cryptocurrencies.

The SEC shall be of no help

A December 2017 statement from SEC chairman notes that decentralized trading can occur outside the confines of the US borders. And, as the transactions are considered to be anonymous, recovering the invested coins may not be possible.

Volatility

Though the cryptocurrencies have been in the market for quite a long time, the price fluctuation is still an issue. This could be due to the fact that people do not yet tend to trust these intangible funds. Moreover, even though a single entity doesn’t govern it, any major world news can the price of the cryptocurrency.

Lack of acceptance

While Bitcoin is welcomed in many countries, there are a few countries that still do not accept them due to its volatility and decentralized nature. Some nations have put a complete ban on it, and some have tried to cut off support from banking systems for its trading and use. Some countries that said ‘No’ to cryptocurrency are

🇨🇳 China

Bitcoin is officially banned in China. All financial institutions are prohibited from transacting with Bitcoin. The crypto exchanges in China are put to ban as well.

☭ Russia

Bitcoin is unregulated in Russia; however, its use as payments for goods and services is illegal.

🇻🇳 Vietnam

Vietnam’s government and its state banks claim that Bitcoin is not a legitimate payment method.

Thefts and Scams

Though cryptocurrency is intangible, there are possibilities of thefts and scams through hacking. Hackers have sophisticated tools that infiltrate cryptocurrency wallets and trading platforms to intercept transactions and send money to their wallets. Some of the Bitcoin scams with examples include,

Fake Bitcoin exchanges: BitKRK from South Korea
Ponzi schemes: Bernie Madoff
Fake cryptocurrencies: My Big Coin

Final Words

It is no doubt that cryptocurrencies have eased out the way of transactions. One can transfer coins to anyone, anywhere, and anytime anonymously of its decentralized nature. Having that said, the volatility, lack of acceptance, and thefts and scams can be viewed as a disadvantage and as a factor of risk.

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Cryptocurrencies

Cryptocurrency Risks You Need To Watch 

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. 

Cold Shoulders

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. 

Human Error 

‘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. 

Technological Risks 

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 Wars

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.  

Conclusion

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.