Biggest Risks For Cryptocurrency Investors [ New and Experienced ]
Cryptocurrency has become very popular over the past decade, and almost everyone has already talked about it or invested in it. However, cryptocurrency investments are not like any other regular investments in the financial system. It does not follow the same traditional investment trends and is subject to ridiculous fluctuations.
There are over 10,000 cryptocurrencies and a large number of cryptocurrency exchanges, with more being added daily. There is a lot to take advantage of, especially for anyone who wants to invest for the first time. This article will address the biggest risks that both new and experienced investors should be aware of in this highly volatile market. Check out the best websites for tracking cryptocurrency stats.
The biggest risks for cryptocurrency investors
Unlike actual money (or fiat money), cryptocurrencies are not backed by banks or governments and are highly speculative. Cryptocurrency transactions exist as digital inputs on the Blockchain. Cryptocurrencies are safe and trustworthy due to the public ledger system used.
While Blockchain may help secure cryptography, the decentralized nature of cryptocurrencies, along with the anonymity they provide, pose additional risks. Here are some of the significant risks associated with investing in cryptocurrencies:
Volatility is one of the primary indicators of the financial health of an asset, and cryptocurrencies are one of the most volatile investment options.
In early 2021, Dogecoin rose more than 20,000 percent, but by May 2021, it had lost more than a third of its value. Wild speculation about the future of the cryptocurrency has caused prices to fluctuate, up and down.
Speculation fuels the cryptocurrency market, with some investors quickly buying and selling their holdings as soon as there is a sign of a price drop. One popular negative tweet or news story about a cryptocurrency can cause its price to drop rapidly.
However, there are still signs that the cryptocurrency market is picking up in terms of volatility. Large trading and investment firms have recently acquired large stakes in most cryptocurrencies. These cryptocurrencies can start to show healthy volatility thanks to the stabilizing influence of these large companies.
2. Information crime
Cryptocurrencies are held in digital wallets and traded through cryptocurrency exchanges. Cryptocurrencies attract a lot of attention from cybercriminals in particular due to their reliance on the Internet and anonymity. To gain access to cryptocurrency wallets and trading platforms, the criminal uses a variety of phishing attacks.
Individuals and companies interested in investing in cryptocurrencies must adhere to strict internet security protocols to protect their assets. It is also helpful to be aware of the latest threats, as well as understand how to protect your crypto assets and crypto wallets.
The lack of a central authority is arguably one of the most attractive features of cryptocurrency.
But this absence has its drawbacks, especially when things are going badly. For example, in most online financial transactions, an EFT is usually supported and mediated by a financial institution. Therefore, if there is a problem with the transaction, you can easily contact the middle party and solve it.
With the cryptocurrency transaction, this is not possible. Its decentralized nature makes it difficult to identify the correct entity with which to file a transaction dispute. As a result, most cryptocurrency investors are advised to trade through reputable digital currency exchanges.
Most of the major exchanges have excellent customer service that can help solve almost any issue. However, the decentralized nature of most cryptocurrencies makes legal dispute resolution nearly impossible.
4. Risks associated with peer-to-peer transactions
A peer-to-peer (P2P) platform is a cryptocurrency marketplace that connects cryptocurrency buyers and sellers directly. On a P2P exchange, any transaction in cryptocurrency is paid directly between the two parties.
These exchanges are one of the simplest ways to convert cryptocurrency into fiat money. However, the human factor is where errors or negligence can result in the loss of your assets. Furthermore, there is always the risk of scams and fraudulent schemes, such as the buyer refusing to pay for the cryptocurrencies received, the 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. The platform holds the cryptocurrency during the transaction using this service. The asset will be released to the buyer once the buyer completes payment and the seller confirms receipt. This ensures that both parties get what they want. If a dispute arises, the platform representative will resolve it. Check out the best cryptocurrency wallets to store your cryptocurrency assets.
5. Loss or destruction of private keys
Cryptocurrencies are built on a cryptographic system that uses pairs of keys to authenticate transactions. One is a public key that is available to the public, and the other is a private key that is kept secret and used for identification and authentication. A private key is automatically generated when you open a crypto wallet and give the user ownership of the funds in that wallet.
Losing a private wallet key means losing control or access to any cryptocurrencies in that wallet. In fact, approximately 20% of all lost Bitcoins are due to the loss or destruction of private keys. Therefore, it is crucial that you back up your private keys regularly, preferably on a secure and isolated computer. Also, never store your private key online, especially if it is not in an encrypted format. Check out the best ways to backup your cryptocurrency wallet keys.
6. Unregulated trading platforms/exchanges
The popularity of digital currencies has led to an increase in the number of cryptocurrency exchanges and trading platforms. As a result, choosing an exchange is becoming more and more difficult. Cryptocurrency exchanges provide the same level of services to the financial market as traditional financial institutions.
However, the lack of regulatory oversight has helped the growth of scams and market manipulation while trading cryptocurrencies. Some commercial exchanges charge exorbitant trading fees and no policies to prevent manipulative or suspicious trading, while completely unregulated exchanges may use predatory practices.
The exchanges may charge exorbitant commissions while making withdrawals nearly impossible. Other options may have poor security, making it easy for a fraudster to steal your money.
The best approach is to find trading platforms and exchanges that have reputable security and noteworthy reviews. Always read the exact terms of their terms of services and avoid platforms with unrealistic claims. Check out the best places to stock up on Ethereum.
7. Territorial organization
Regional regulation of countries is one of the most serious threats to the continued growth of cryptocurrencies. Governments around the world have enacted regulations to limit the use of cryptocurrencies in their territories. Many governments view cryptocurrencies as a way to circumvent financial regulations and facilitate money laundering.
Currently, most governments are looking at how to integrate cryptocurrencies with their existing fiat currencies. Other countries, such as El Salvador, have fully embraced cryptocurrencies, with some even launching or considering launching a national digital currency. There is still a significant risk of legislation that could restrict the use of cryptocurrency.
8. Currency Conversion Risks
Cryptocurrency prices fluctuate frequently, making it a high-risk investment. For example, the price of Bitcoin rose from $20,000 in December 2020 to over $65,000 in April 2021, before dropping to around $28,000 by June 2021. You would have made a huge profit if you had bought Bitcoin in January and sold it by late April. Holding your Bitcoin assets for a few days could have resulted in a significant loss of dollar value.
Since most cryptocurrencies are volatile, their value fluctuates in relation to traditional currencies. Additionally, since digital currencies are speculative, the investor is at the mercy of whatever value they have at the time of the sale.
9. Tax laws
Cryptocurrencies are classified as capital assets, which means they are subject to the same tax regulations as stocks. According to the IRS, when you use cryptocurrency to buy goods and services or exchange it for other currencies, you are subject to capital gains tax. Also, any cryptocurrency obtained through mining is taxed.
Cryptocurrency investors are required to report their earnings as income on their tax returns. However, not all cryptocurrency transactions are taxable. The purchase, storage and transfer of cryptocurrencies between exchanges or wallets is exempted. Cryptocurrency laws can be complex, but you can catch up on speed by reading the IRS Virtual Currency Guidelines.
Should you invest?
Investing in cryptocurrencies is very risky, and you need to be prepared for any eventuality. It’s the wild choice, and because of its decentralized and unregulated nature, it’s riddled with scam artists and cybercriminals. Every inexperienced investor should only invest what he can afford to lose without suffering serious consequences. Now check out how to research cryptocurrency details before investing.