Just like many things in life, cryptocurrencies usually come with their own load of risks; whether you want to invest in them, trade them, or just save them for the future, you must consider and assess the risks or dangers associated with cryptocurrencies before you put a stake on them or get financially involved in them. Cryptocurrencies are associated with a number of risks and mistakes that have cost some people a ton of money; however, risk could be relative and may require each person to approach it individually because what presents a risk to one person might not represent a risk to another person, and each person has their own unique lifestyle and financial circumstance(s). This article discusses 11 major risks associated with cryptocurrencies.
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11 Major Risks
Associated with
Cryptocurrencies
July 2021
EDITED
BY IHAGH GODWIN
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Motivation & Environment
Presents:
11 Major Risks Associated with
Cryptocurrencies
Copyright Free: You may distribute
without permission, and share with
anybody
Edited by Ihagh G.
MSc (Water Resources & Environmental Eng.),
BSc (Civil Engineering), and 7 years university
teaching experience
Editor, Motivation & Environment
Email: godwinihagh@gmail.com
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11 Major Risks Associated with
Cryptocurrencies
You might have heard about famous cryptocurrencies or cryptos
like Bitcoin, Ethereum, and Litecoin, but there are many other
popular and highly valuable cryptocurrencies out there.
Although the cryptocurrency or crypto market has a ton of
volatility, it also has the potential to earn you make a lot of profit
and even make you become rich if you invest wisely and employ
strategies that are in harmony with your personal risk tolerance.
It is exciting to invest in cryptocurrencies, especially when great
returns can be made from an investment; however, as it is with
other types of traditional investments, as you consider making
great returns, also consider the risks or dangers associated with
cryptocurrency investments.
Just like many things in life, cryptocurrencies usually come with
their own load of risks; whether you want to invest in them, trade
them, or just save them for the future, you must consider and
assess the risks or dangers associated with them before you
place a stake on them, or get financially involved with them.
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When you make any investment, it is advisable to consider risk(s)
which is actually related to the uncertainty surrounding the
return(s) on investment you expect to make. Regulation risk and
volatility risks are two of the most talked-about cryptocurrency
risks.
In 2017, volatility, in particular, was uncontrollable, and the
price of most major cryptocurrencies, including Bitcoin,
skyrocketed above 1000% before it came down crashing and
made some investors lose varying amounts of money.
Because crypto prices sometimes rise too much, and in a short
period of time, they sometimes crash hard and fast; for instance,
in February 2018, Bitcoin dropped from nearly $20,000 to as low
as approximately $6,000.
10 Reasons Why You Should Invest in Cryptocurrencies
Especially on a Long-term Basis
In certain instances, cryptocurrency investing has been a get-
rich-quick scheme for some people, but this doesn’t mean you
should take a loan or your life savings and invest in cryptos.
You must consider the risks or dangers associated with
cryptocurrencies, understand the different types of
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cryptocurrency risks, and then apply or develop an investment
strategy that suits your risk tolerance.
Always remember that early Bitcoin investors waited on a long-
term basis—for several years—before they saw any returns,
especially substantial and great returns! If you can’t be patient
enough to wait for meaningful returns on cryptocurrency
investment, then it may be better not to invest in cryptos.
Cryptocurrencies are associated with a number of risks and
mistakes that have cost some people a ton of money; however,
risk could be relative and may require each person to approach it
individually because what presents a risk to one person might
not represent a risk to another person, and each person has their
own unique lifestyle and financial circumstance(s). The following
are the major risks associated with cryptocurrencies:
1. Risk due to the hype surrounding cryptocurrencies
One of the major reasons why cryptocurrencies have a lot of hype
is that some people don’t know much about it and what they are
investing in; they only know the names of cryptocurrencies and
follow the voice of the crowd which is usually hyped.
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In 2017, the general hype about cryptocurrencies was one of
many drivers that created a surge in investments in the crypto
market; however, and unfortunately, the hype made a lot of
people invest and before some of them could figure out what was
happening, cryptocurrency prices crashed and many of them
suffered losses.
Ignore the hype in the cryptocurrency market, be patient and get
the right knowledge about the cryptos you’re interested in
investing in. Instead of gambling and taking a risk by making
investments based on the current hype, find out more about the
cryptocurrencies of your interest before you finally invest in
them.
2. Risk due to security failure: fraud/cyber risk
Since the cryptocurrency market started with Bitcoin in 2009,
scams, hacking and thefts have been issues in the
cryptocurrency market, and have temporarily compromised the
values and prices of various cryptos.
Since the inception of cryptos, the criminal community and its
criminals have been attracted to the crypto market, and have
sometimes broken into cryptocurrency exchanges, drained
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cryptocurrency wallets, and even infected computers with
malware that steals cryptos.
While cryptocurrency transactions are being conducted on or
across the internet, cybercriminals or hackers use phishing,
malware, and spoofing to target crypto services and computer
security systems that have been designed to protect
cryptocurrencies purchased by people. Once a cybercriminal
successfully transfers any cryptocurrency out of a wallet, and the
transaction is recorded on its blockchain, that cryptocurrency
would likely be lost forever.
Softwares used by cryptocurrency platforms could be
untrustworthy at times; in the past, sourcing of blockchain
technology could have led to significant third-party risk exposure;
as a result, many cryptocurrency platforms, which are usually
unregulated, have been vulnerable to thefts and frauds more
than regulated financial institutions have.
3. Risk due to negligence or forgetfulness
If an investor, registered user of a cryptocurrency exchange
platform, or crypto wallet owner is negligent, then a
cybercriminal or fraudster could gain access to the investor’s
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private secret key and steal cryptocurrencies from the investor’s
digital wallet; in addition, any investor can lose their cryptos
because of their own human error, forgetfulness, or memory loss.
There have been unfortunate incidences when cryptocurrency
owners lost access to their secret keys because of their own
ignorance; as a result, they lost access to the cryptocurrencies in
their crypto wallets. In other cases, crypto owners have
unintentionally deleted their key file, or broken the hard disk of
the computer in which they stored or saved their cryptocurrency
details.
4. Risk due to technological limitations
Nothing in life is perfect; even technological components, which
usually have limitations, are constantly being developed and
ungraded very quickly, and often uncontrollably.
Although Bitcoin and other popular cryptos are in high demand,
newer cryptos or competitors appear on a daily basis. Despite the
advantage that Bitcoin and other popular cryptos’ brand
awareness have, there is a potential risk that their technologies
and brands could lose value if other more advanced
cryptocurrencies and technologies appear in the crypto market.
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This implies that, with the influx of cryptos on a daily basis,
investors might not be able to notice when the “popular cryptos”
they invested in lose their real value.
Reports abound that the energy consumption and computational
complexity of bitcoin mining are examples of the technological
limitations of cryptocurrencies. Computational complexity may
pose potential risks to people’s assets if we agree with the
premise that complex systems fail in complex ways!
Although it’s true that each blockchain structure’s decentralized
feature provides a certain type of protection that centralized
databases don’t enjoy, not all cryptocurrencies are on the same
level: not all blockchains are equal; therefore, investors should
beware of risks due to technological limitations present in the
types of decentralization that are inherent in many
cryptocurrency projects.
5. Risk due to the probability that any cryptocurrency can
vanish
There are currently thousands of cryptocurrencies are out there,
and many more are being created every day; and it is highly
probable that in a few or several years’ time, many cryptos may
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vanish, while others may flourish and become much more highly
valuable.
Investors should assess the cryptocurrencies they wish to invest
in and find out whether their goals will be worth any money or
time in the form of investment. Do the goals of the cryptos of your
interest make any sense?
Are the cryptos of your interest going to remove a limitation or
solve a general problem that may continue in the coming years?
Although you can’t erase the probability that a cryptocurrency
would vanish, you can reduce the probability or eliminate the
chance of investing in a cryptocurrency that could vanish.
Following the path of history, many of the cryptocurrencies
currently popping up from every corner are likely destined to
crash, become a bust, or head for doom!
6. Risk due to illiquidity (or lack of liquidity)
By definition, illiquidity is the potential any substance or form of
investment—in this case, a cryptocurrency—possesses which
makes it not to be readily or easily liquidated, sold, or converted
into physical cash. It is important for any cryptocurrency or
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tradeable asset to exhibit liquidity, or be easily converted into
physical cash.
The absence of liquidity can be a problem in the crypto market;
in fact, it is one of the factors that have led to the high volatility
in a number of cryptocurrencies.
Whenever a crypto has low liquidity, there is a tendency for the
price of the crypto to be manipulated because one person or
entity can use a huge capital to make massive orders and easily
move the crypto market in their favor; this can make the value
and price of the crypto to be volatile and pose a risk to other
investors who have different goals.
Whenever you want to choose a cryptocurrency to invest in or
trade, consider its level of liquidity by analyzing its popularity,
level of acceptance, and the number of exchanges that accept it
on their platform and allow people to make trades with it.
Although many cryptocurrencies may have a lot of potentials,
they may put investors in trouble in the future because they lack
some level of liquidity.
7. Risk due to uninsurability
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The illiquid and intangible nature of cryptocurrencies increases
their uninsurability because it is difficult for them to be
converted into cash, especially in the form of traditional fiat
currencies.
Cryptocurrency illiquidity and intangibility make crypto assets
insecure and highly uninsurable, and also creates a tendency for
insurance companies to refuse to provide insurance for cryptos
because of the logical standards they have in place for issuing
insurance.
Despite the reported interests that insurance companies have in
cryptocurrencies, based on today’s standards, the majority of
cryptocurrency companies and cryptocurrency assets are either
uninsurable or underinsured.
8. Risk due to volatility
As a result of unexpected movements in the crypto market,
investors can easily be caught off guard, especially those who
want to make gains on a short-term basis: the cryptocurrency
market can suddenly move in a direction that’s different or even
completely opposite from what most people expect.
11 Factors that can Determine Bitcoin Price Volatility
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If an investor isn’t aware of how volatile the cryptocurrency
market could be, they could lose the money they’ve invested in
any crypto asset(s). The best way to combat cryptocurrency
volatility risk is by investing in cryptocurrencies on a long-term
basis.
It’s important to consider volatility if you want to invest and
make gains on a short-term basis; however, if you have a long-
term investment plan, volatility can present you with a great
opportunity.
9. Risk due to governments’ constant regulation changes
Although one of the things that initially attracted people to
cryptocurrencies was lack of regulation, especially through
various governments which have individually different standards,
the constant regulation changes (regarding cryptos) made by
some governments often put investors at risk because each
investor reacts differently—even in detrimental ways—when
governments make unexpected regulation announcements.
For instance, in 2017 when China decided to halt the activities
on several trading platforms, the price of Bitcoin plummeted. In
2018, within 24 hours after various governments in Asia made
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announcements concerning expected regulatory changes, there
was around a hundred billion dollar drop in the cryptocurrency
market.
In 2018, each apparently little regulation announcement caused
unnecessary price fluctuations of major cryptocurrencies and
created a ton of volatility. Governments have been constantly
changing regulations regarding Bitcoins, and the changes have
caused Bitcoin price fluctuations and made Bitcoin volatile at
certain points in time.
10. Risk due to the nature of individual cryptocurrency
markets
Generally, cryptocurrencies aren’t backed by any national or
international organization, any central bank, and any credit or
assets. The nature of each crypto market, as expressed through
the value and price of each crypto, is solely determined by the
degree of interest that investors or participants show towards the
crypto, especially through the transactions and trade volume of
the crypto.
In other words, the value of a crypto is determined by and
created from the interest that participants show in the crypto;
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loss of interest or confidence from participants could affect or
collapse trading activities and also drop the value and price of the
crypto.
The nature (price and value) of each crypto is unpredictable and
poses a risk because it is highly probable for the price and value
of each crypto to deteriorate because of hoarding; the price and
value are often fuelled by speculative demand which is
unpredictable.
11. Risk of facing strict taxation
When cryptocurrency investing initially started and was
gradually becoming, it was difficult to find anyone paying taxes
on their profits or gains. However, as the crypto market
continued to expand and governments plan on regulating it much
more, various governments may become stricter on taxation.
As of 2018, the U.S. Internal Revenue Service regarded each
cryptocurrency as a “property”—just like each house—despite the
fact obvious fact that each cryptocurrency is actually a currency.
The implication of this is that transactions involving the use of
cryptocurrencies are subject to capital gains tax.
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Therefore, if you live in the United States, you face the risk of
experiencing stricter tax, now or in the future, especially if
government authorities make unfavorable changes in tax laws,
such as an increase in tax rates, limitation of deductions, and
elimination of tax exemptions.
With the current level of increasing interest in cryptos in every
country, it may be difficult or impossible to predict how strict or
complicated taxation on cryptos would be in the future. Although
almost all investments are susceptible to increases in tax rates,
cryptocurrency taxation is blurry because most governments or
regulators haven’t yet agreed on or figured out what each
cryptocurrency token actually represents.
Conclusion
Investing in cryptocurrencies could be risky nowadays, especially
on a short-term basis, and there is not always any guarantee of
making minimum profits. Investors have to understand what the
cryptocurrency of their interest is about and have a clear strategy
or plan of action for all types of unpredictable scenarios that
could come into play. In addition, each investor—experienced or
inexperienced—should invest only the amount(s) of money that
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they would be willing to lose without falling into serious
consequences.
Take matters into your own hands as much as you possibly can:
before you choose a cryptocurrency to invest in, or an exchange
platform to invest on, inquire about its level of security on its
website, and whether the exchange platform encourages safety by
participating in any bug bounty programs. In addition, ask the
right people about the crypto exchange of your interest.