Cryptocurrency investment has exploded over the past few years, with some cryptocurrencies skyrocketing in value.
Yet cryptocurrency investors face all sorts of risks that traditional investors don’t have to deal with—risks that, if not managed properly, can lead to heavy losses and even drive the market as a whole into decline.
Here are 10 cryptocurrency risks worth your attention to keep your investments safe and profitable over the long term.
1) Centralized Authority
Centralized authority with cryptocurrency exchanges puts it all on one website. In other words, it becomes a single point of failure, which is risky if that site should crash or lose data for any reason.
If you want to get in and out of your cryptocurrency, fast and secure—and you want to do it from anywhere in the world—you’ll need an alternative solution. A decentralized currency exchange system makes that possible.
It’s also less susceptible to hacking attacks because there are no central servers to breach. And because it relies on peer-to-peer networks, there are no single points of failure either.
2) No Clearing House
Today, transactions are not entirely secure as there is no clearinghouse for cryptocurrency. If you invest in cryptocurrency and a business selling it goes out of business or becomes insolvent, your currency can become worthless.
You should only invest in cryptocurrencies through an exchange that has some tracking or escrow mechanism (more on that later). This helps ensure that your money goes where it’s supposed to when a transaction is complete.
While a cryptocurrency itself may be safe from being hacked, individual exchanges are another story. In 2014 Mt Gox—one of the biggest cryptocurrency exchanges at that time—lost $460 million worth of Bitcoin in one hack; at today’s prices, that would be almost $6 billion!
While regulators have been relatively quiet regarding digital currencies, recent moves by authorities in South Korea and India suggest that they take a harder stance on cryptocurrencies.
With the mainstream adoption of digital assets still far off, don’t expect significant regulatory changes in 2018. However, you should keep an eye on regulations that could impact your business.
For example, Nasdaq recently said it would consider offering cryptocurrency trading to its clients; any further developments from these companies or others could affect how cryptocurrencies are traded.
Market volatility makes cryptocurrency a risky investment choice. To understand these risks in-depth, you’ll want to do your research. CoinMarketCap is a great tool for crypto enthusiasts, while Yahoo Finance provides summaries of news events that may impact volatility.
The most important thing to remember when it comes to cryptocurrency is that there are no guarantees.
While investing in cryptocurrency can be lucrative, it can also be very risky if you don’t know what you’re doing. If investing in cryptocurrency isn’t something you feel comfortable with, then don’t do it! There are plenty of other ways to make money with cryptocurrencies aside from buying them as an investment—you could even buy some just because they look cool!
5) Transaction Fees
Most crypto investors are aware of transaction fees and their role in cryptocurrency, but they can be more than annoying. Fees are related to trade volume and vary based on many other factors, including the technology used.
For example, some businesses charge a flat fee per transaction, while others charge a percentage of total funds traded. While these types of commerce may seem small at first glance, they can add up over time.
In fact, some cryptocurrency exchanges have been known to charge upwards of 0.2% or even higher per transaction! That may not sound like much now, but if you’re trading large volumes, it could cost you thousands—or even tens of thousands—of dollars over time!
6) Hacking Risk
Hackers and thieves are looking for ways to steal your money. Make sure you have strong passwords and 2-factor authentication to help protect yourself against cryptocurrency hacking risks.
If a hacker manages to get a hold of your coins, there’s no going back—they’re gone forever! When considering allocating funds from an exchange or wallet, keep that in mind—be smart about where you store them. There are many great cryptocurrency wallets; make sure you do your research before deciding on one.
7) Value is Based on Belief in Project
A cryptocurrency can lose its value quickly since no single central entity manages it. Unlike most fiat currencies, governments and banks manage money supply and stability.
And if you don’t believe in a cryptocurrency project, that won’t matter much because you likely won’t have many transactions to make with it. So when considering cryptocurrency risks, remember that belief in a project is crucial for long-term success.
8) Lack of Understanding/Support from Banks/Financial Institutions
At present, there is no centralized cryptocurrency bank. As a result, buying cryptocurrencies can be difficult if you don’t know where to buy them or how.
It may be hard to find an alternative way of buying your favourite coins if banks are refusing service. This Risk should decrease as cryptocurrency becomes more mainstream and recognized by financial institutions. However, if cryptocurrency becomes too popular, that could also lead to its downfall as governments crackdown on its use.
9) Lack of Privacy Protections/Data Protection Laws
Cryptocurrency trading involves public ledgers and allows anyone to see your transaction history. This can be a problem if you are not confident in sharing such details with others.
It may cause privacy issues, especially regarding your personal information, data protection laws, and other regulations. Suppose you will trade in crypto markets like any best cryptocurrency software development company in India. In that case, that is nowadays must secure your privacy.
10) Illiquidity Issues
Crypto exchanges need to maintain some of their cryptocurrency holdings in cold storage since they can’t just pull it out of thin air whenever you order to buy or sell.
That means there is always a lag between when you place an order and when that order is processed and then fulfilled by another person who wants to buy or sell at that same moment.
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From a practical standpoint, cryptocurrency is here to stay. The financial sector will continue its development in cryptocurrencies, and crypto exchanges will continue developing alongside them.
You can also hire a top cryptocurrency exchange development company in India if you are interested in getting into cryptos. Any business that uses cryptocurrencies should think about investing in cryptocurrency risks too.