Want to invest in cryptocurrency? Know these risks
Cryptocurrencies seem like a lucrative investment, but they come with their fair share of risks.
FollowInvesting in cryptocurrency has come under the scanner after the high levels of volatility it has been facing. Last week, it saw a huge fall after China's tight crackdown on Cryptocurrencies and Elon Musk's tweet about the environmental impact.
However, it soon bounced back up. These huge fluctuations are but normal for cryptocurrencies and may increase as the prices continue to increase. So, before you invest in cryptocurrencies, here are a few risks that you need to keep in your mind.
The not-so-safe key to the "vault"
All cryptocurrencies are stored in digital wallets and are usually held by public and private key held by the owner of that digital wallet. If the key gets lost or compromised, the access to the crypto is gone. If the key gets known to someone else, they may access the crypto themselves as well.
Phishing and Stealing
Trading platforms are very vulnerable to hacking. In September 2015, BitPay lost 1.8 million dollars to a phishing attack. In August 2016, 72 million dollars worth of bitcoins were stolen from the Bitfinex exchange in Hong Kong, which led to a 23% drop in prices. It just takes a hacker to gain control of the consensus nodes to alter the blockchain.
Though these networks are decentralised, there are many centralised mining pools that are increasing the risk of such attacks.
The peer-to-peer faux pas
Due to the multiplicity of online trading platforms for crypto, the risks also increase. For example, for peer-to-peer transactions, they just bring together many agencies without providing any clearing or intermediary services and thus are not regulated. These may result in risks such as double-selling etc.
The trading platform risks
Because of being largely unregulated, trading platforms only provide limited visibility. They have come under heavy scrutiny following cases of fraud, business failures and security breaches.
Though trading platforms are not mandatory for crypto, such platforms are used for trading in multiple currencies.
Speculative Fluctuations
Digital is the new normal, but it is highly uncertain. Most cryptocurrencies do not have the backing of central banks, and the values are highly dependent on speculation. Any loss of confidence can lead to the markets crashing.
Recently, the markets fluctuated with the changing stances of Tesla. At first, in February, they decided to accept cryptocurrencies as payment. Then in May, they decided not to accept it anymore. Recently, Elon Musk tweeted about possible environmental impacts of mining, which led to the speculation that he may have sold his 100 million worth of investments in bitcoins, which he later denied. All this led to huge fluctuations in prices, owing to mere speculations.
The legality question
There are significant inconsistencies with investing in cryptocurrencies. Many countries have banned the trading of cryptocurrencies. Many regulators are also concerned about the safety that it may be used by terrorist outfits.
Countries such as Saudi Arabia, North Macedonia, Algeria, Morocco, China and Bolivia have banned crypto. China, Russia and Vietnam are also on this list.
Uncertain Taxations
There are no steady rules for the taxation of cryptocurrencies. In certain countries, it is treated as assets, and in certain countries, it is treated as currency. So, it becomes difficult for investors to manoeuvre through different rules to stay clean on taxation.
The Network Slow-down
The main process through which bitcoins are created and transactions are verified is called mining. These are done through downloading of particular software, and then the device used becomes a node to validate details of transactions. The miners are then awarded bitcoins plus transaction fees. However, if the transaction fees are low or the volume of transaction is high, the blockchain may face a slow-down. This may result in failed transactions.
Although cryptocurrency is now over ten years old, there are still multiple challenges in investing in the same. One must be aware of all the risks it may involve and only then make an informed decision in investing their hard-earned money.
