What are the Risks of Investing in Cryptocurrency?
Is Crypto Safe to Invest in?
As the popularity of cryptocurrency investment increases, investors need to be aware of the risks involved in this type of investment. Cryptocurrencies are a comparatively new asset class, and there is still a lot of uncertainty about their long-term value.
There is also a high degree of volatility in the prices of different cryptocurrencies, which can lead to large losses if an investor is not careful. In addition, there are several security risks associated with cryptocurrency investments, including hacking and theft. Before considering whether you should invest in cryptocurrencies or not, it is imperative to understand cryptocurrency risks and how they could impact your portfolio.
This blog post will explore the biggest risks every cryptocurrency investor should be aware of.
A lot has been written about how blockchain will revolutionize digital transactions, but many consumers don't realize just how risky investing in cryptocurrency can be without understanding all their potential risks beforehand.
Here are a few common cryptocurrency risks you should be clear on
By now, even someone with little knowledge about cryptocurrencies will likely be aware that they can vary drastically in price. The landscape is filled with huge swings from high to low or vice versa! Just between July and October 2021 alone, Bitcoin traded at $29k before jumping up over $63.5k within three months.
These unpredictable prices mean that it can be hard to predict the long-term performance of cryptocurrencies.
The volatility of cryptocurrency is one reason you should be aware of, but there are other factors. For example, the tendency for prices to move without any good explanation or reason makes it important that your investment strategy includes understanding how quick and sudden losses can happen in this space. Only a few tweets by Elon Musk can lead to wild swings in the crypto market.
Cryptocurrencies may be new technology, but they're not magic. You still have to take care if you want your investment safe and sound!
You will store cryptocurrencies in an encrypted digital wallet protected by private keys.
Your private key is a series of letters and numbers representing you on the blockchain. It's like an access card for accessing your wallet, but it can also be used as the basis for recovering funds if misplaced or forgotten about! If anything happens to go wrong when generating these keys, then all cryptocurrency assets will likely disappear forever.
With the private keys to your wallet being so long, you will also receive a 12-word phrase known as "seed phrase." These can be used for recovery if ever necessary.
You should take great care to save your seed phrase because if you lose it, the funds in your wallet will be lost forever.
Cryptocurrency has become increasingly popular over recent years, but the associated risks are not worth taking for granted. According to The Hacker News, In August 2021, $600 million worth of crypto assets were hacked when Poly Network's site was compromised by hackers who took advantage of human error in storing sensitive information on its platform.
In this case, we see how easy it is to gather personal data like passwords and private keys, which can then be used against you or your company if accessed maliciously.
Hackers can easily access your digital crypto wallet if you don't take proper precautions. Hot wallets, such as mobile and desktop apps stored online or on a computer, are heavily encrypted.
However, they still need an internet connection for transactions to happen.
This means that these funds cannot be completely secure no matter what kind of device is used since there's always some vulnerability with connecting oneself directly into networks run by others.
Other forms of crypto wallets are called 'cold storage systems' and act as offline storage.
Cold wallets usually come in two different forms:
No matter what sort of wallet you use, there is a potential risk attached to it – if you misplace it, you can bid your funds goodbye.
The best practice is to use both kinds of wallets in conjunction to safeguard your digital assets.
The beauty behind this technology lies in its decentralization - no single person/organization controls everything.
So there's never any fear about someone shutting down your account because they disagree with what you're doing; instead, it'll always remain open until consensus has been reached amongst all users via votes on different blocks.
At the same time, this 'decentralization' can come as a double-edged sword. In case of a hacking or theft attempt, there won't be any central authority that can help you sort the issue out. Due to this unreliable nature, The Financial Conduct Authority (FCA) advises that investors should be prepared for the possibility of losing their entire investment.
There are a lot of legal considerations for cryptocurrency investors, but the critical one has to do with the way government tax authorities view their investments. Their views on this subject continue evolving, and you need to keep an eye out in case they make any more pronouncements about what types or amounts will be taxed moving forward.
Holders of cryptocurrency wallets may soon be required to file FinCEN Form 114, the report that requires U.S.-based taxpayers with substantial holdings in foreign bank accounts.
Furthermore, cryptocurrencies could get hit by new regulations from America's financial authorities—and this is because these digital coins can technically belong both as assets under securities laws depending on what jurisdiction you live within at any given time.
The IRS has classified cryptocurrencies as property rather than currencies when it comes to taxes. This means that individual investors are subjecting themselves and their profits regarding capital gains tax laws when reporting on how much was earned or spent during last year's return regardless of where they purchased digital coins.
As in other financial areas, businesses have many regulations and requirements to register with specific jurisdictions. However, due to digital currencies' complex legal status within the cryptocurrency market, what needs to be done when operating within this space is less clear - making sure you're fully compliant can be difficult without some guidance.
Many companies only accept cryptocurrencies as payment, and they may not need to register or obtain licenses at all. On the other hand, in some cases, it depends on what jurisdiction you're located within.
It is the responsibility of business owners and managers to ensure they follow proper legal procedures for their operations at both local levels as well state.
There has been a lot of talk about how cryptocurrencies, such as Bitcoin and Ethereum, can be used by criminals to commit fraud.
However, this doesn't directly impact most cryptocurrency investors who don't want their money turned into an easy avenue for crime-family activities.
A widespread belief holds that crypto helps make financial transactions more opaque, which provides only network, and even individual users, with improved opportunities to hide crimes like laundering cash through exchanges or buying weapons overseas via darknet markets. All without drawing attention from regulatory bodies.
The unfortunate situation for investors who find themselves victims of financial crime is that they may not have the same legal options.
When hackers target a cryptocurrency exchange and steal customers' assets, there's often no standard practice for recovering the missing funds.
When sending cryptocurrencies, it's important to input a receiving address. These come in the form of long strings of numbers and letters- not uncommon even for experienced users who can make mistakes while typing or copying/pasting an existing one.
If you end up typing the wrong address, your funds will be gone forever.
If you are sending a large sum of money, it is best to split the transaction into multiple smaller ones so that even if something goes wrong with one individual transaction, not all will be lost.
Cryptocurrency, therefore, comes with a risk of technical complexity. If you don't know what you are doing, you can end up losing your entire investment.
Cryptocurrency is still far from universally being accepted as a unit of payment. Many companies and payment apps have been promoting the use of cryptocurrency as a valid payment method.
A few of the companies to follow suit are:
Investors should be aware that the reluctance to adopt cryptocurrency as a legal way to pay for goods by most companies is still an ongoing issue.
The cryptocurrency markets have been gaining momentum as more people invest in them. You may want to get involved if you're looking for an edge over traditional financial infrastructure, but know that there are risks associated with this industry as well. Risks like volatility, slow mass adoption, rising taxes, regulations, and more.
You can make money in the cryptocurrency markets, but you must be aware that it may bring new types of risks. Many people believe there will always remain advantages over traditional financial infrastructure because this is an innovative field with developing technology every day.
Stay ahead of the curve by educating yourself and taking good digital security measures. You'll have a fighting chance at staying secure in this ever-changing ecosystem if you're willing to invest some time into learning about digital security following industry trends for protection against malware or phishing attempts.
Most importantly: never underestimate how much risk you can take. Crypto is a great and safe way to invest only if you fully understand the risks involved and vigilantly safeguard your assets.
To find more resources you can dive into and how to invest wisely, check out our ATAIX Invest.