The risks and drawbacks of digital currencies
Cryptocurrencies are virtual currencies secured by cryptography, designed to be a medium of exchange like traditional currencies and also to store value like gold. Digital currencies are completely independent of any central intervention, as they are not linked to either a government agency or any central bank. But this does not completely protect it from risks, so what are the risks of digital currencies and what are the most prominent disadvantages of digital currencies?
In simple terms, a cryptocurrency is a digital asset that is spread across multiple computers in a shared network. The decentralized nature of this network protects it from any control from government regulatory agencies. The term “cryptocurrency” itself is derived from the cryptographic technology used to secure the network, in which records of individual ownership are stored in a network called a blockchain.
It is essential to educate yourself on the potential risks involved with digital currency downsides. This article will help you understand the most prominent cryptocurrency risks and negatives associated with them.
5 major risks of digital currencies
There is no doubt about the space that digital currencies are occupying in the financial sector, as they are serving as a growing alternative to traditional forms of investment. The likes of Bitcoin, Ethereum, and Ripple are very popular, with nearly 31% of young people between the ages of 18-24 preferring to invest in cryptocurrencies. But this does not absolve digital currencies from a set of negatives and risks that you should be aware of.
The following are the most prominent digital currency risks that you should pay attention to:
1- Digital currency fluctuations
Huge price swings have become an integral part of the cryptocurrency landscape, with Bitcoin trading below $3,000 and above $6,500 between July and October 2021.
These booms and booms make it very difficult to predict the long-term performance of various cryptocurrencies. Although this characteristic may apply to any investment, the reasons that lead to the volatility of digital currency prices may seem somewhat silly, such as Elon Musk’s tweets. Therefore, you must bear in mind the severity of the losses and risks that may result from the volatility of digital currency prices.
2- Store digital currencies
When you buy cryptocurrencies, you take on more responsibility for storing your assets than you would when investing in other areas.
You will have to store your digital coins in a digital wallet encrypted with a private key. Due to the length of the private key, you will also be given a 12-word phrase known as the seed phrase, which can be used to recover funds and access your wallet. If you lose or forget your copy of this phrase, your digital currency assets will be deposited forever.
3- Security of digital currencies
Digital currencies are not subject to human errors, as we mentioned earlier. Rather, one of the most important risks of digital currencies is their vulnerability to piracy and other security breaches. $600 million in crypto assets was stolen in August 2021, when the Blockchain website Poly Network was hacked.
Cryptocurrency wallets are also called hot wallets, which means that although they are heavily encrypted and stored online, this does not make them 100% secure from hackers. Other forms of cryptocurrency wallets are called cold wallets and act as offline storage systems. These cold wallets usually come in two forms:
Wallets that can be connected to your computer even though it is offline.
Paper wallets, where you write down the private key and public address of your cryptocurrency wallet.
It is essential to back up both forms of a cold wallet to protect yourself from losing your assets, and we recommend that you use hot and cold wallets side by side if you intend to store cryptocurrency.
4- Regulating digital currencies
Cryptocurrencies are not highly regulated, which puts investors vulnerable to theft, hacking, and fraud, in addition to extreme price fluctuations. Investors should be prepared to lose their investment if something goes wrong.
There are many scams that characterize the cryptocurrency industry that you should look out for in order to avoid falling for them. The most popular operations are emails, fake celebrity messages, etc.
5- Environmental concerns of digital currencies
The impact of digital currencies on the environment is one of the important factors that you must take into consideration before deciding to enter the investment world.
Cryptocurrency mining is so energy intensive that the carbon footprint of Bitcoin alone is comparable to that of the entire world. Although this environmental impact affects you directly, it is an unavoidable part of evaluating whether or not to invest in cryptocurrencies
Advantages and disadvantages of digital currencies
Digital currencies have the following advantages:
- It made transferring money between two parties easy without the need for a third party.
- Being a cheaper alternative compared to other online transactions.
- Payments are secured and provide a high level of confidentiality.
- Modern cryptocurrency systems come with a user ‘wallet’ or account address that can only be accessed through a public key and a hacking key.
- Allows money transfer with minimal processing fees.
The disadvantages of digital currencies are as follows:
- Being vulnerable to illegal activities such as money laundering, tax evasion and possibly even terrorist financing.
- Payments can be easily reversed.
- Digital currencies are not accepted everywhere.
- Digital currencies are not rooted in any physical goods.
What are the types of digital currencies?
- The first digital
- What are the types of digital currencies?
- The first digital currency created was Bitcoin, and it is still the most traded, most valuable and popular. Many other digital currencies were created after it with different goals and projects.
Bitcoin was launched in 2009 by an individual or group known as Satoshi Nakamoto. There were more than 18.6 million bitcoins in circulation with a total market capitalization of about $927 billion as of March 2021.
The cryptocurrencies that were created following the success of Bitcoin are known as altcoins, here are some examples:
- Ethereum
- Litecoin
- XRP
- Cardana
- polkadot
- Decentraland
The total value of all cryptocurrencies in existence at the time of writing this article is about $1.5 trillion, with Bitcoin accounting for more than 60% of the total value.
Frequently asked questions related to digital currencies
How do digital currencies work? Digital currencies are encrypted currencies used to purchase goods and services by using an online ledger, in addition to strong encryption to secure transactions. What distinguishes digital currencies is that they are not subject to any regulation.
How is money made from digital currencies? The most popular way to make money from cryptocurrency is to buy coins like Bitcoin, Litecoin, Ethereum, and Ripple and then wait for them to go up in value to sell them at a better price.
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