Is cryptocurrency a risky investment?

Like with any investment that you may make, there are always risks associated with cryptocurrency investments. Digital currencies have grown exponentially despite wild swings in the crypto market, and investors are often left baffled by the unexplainable gains and losses experienced. Many view cryptocurrencies as the future of monetary exchange despite their unpredictable nature. Whilst there is great optimism for the crypto market, it is important to educate yourself on the risks of crypto investments.

Risks of cryptocurrencies

Regulatory

There is a lack of regulatory framework in the crypto market, which leads to uncertainty regarding manipulation and price volatility. Different countries have taken varying approaches in an effort to regulate cryptocurrencies. Since no unified regulatory system exists for cryptocurrencies, this increases the uncertainty surrounding crypto investments and the overall market. Although there has been a shift in perspective from some governments who are slowly adopting digital assets, the vast majority remain sceptical and have tightened restrictions on cryptocurrencies.

Technological

The technological aspect of digital assets develop fairly quickly. Whilst the more established cryptocurrencies may be at an advantage due to their popularity and large venture capital investments, there is always the technological risk that newer cryptocurrencies may emerge as a more advanced cryptocurrency. This, in turn, has the potential to devalue existing cryptocurrencies. The concept of cryptocurrencies continue to innovate as it develops, so it is possible for something unexpected to arise.

There is also the risk of a cryptocurrencies protocol software being infected with bugs. Whilst the likelihood of this is low, the continual developments and upgrades with new codes make its technology vulnerable to attack vectors. In terms of Bitcoin, developments like Taproot can make the currency’s underlying protocol prone to infiltration. Ether has a higher risk due to the Ethereum blockchain’s development of a proof-of-stake (POS) consensus protocol. The POS is an experimental technology, and with such projects comes the possibility of code bugs and failures that show up at the implementation stage.

Competitors

When looking at the two biggest cryptocurrencies in the market, Bitcoin and Ether, there is always the risk that a more efficient and secure competitor could replace those digital assets. Whilst the possibility exists, as these digital currencies are based on open-source code, the reality is that it is highly unlikely.

Due to the sheer size of both the Bitcoin and Ethereum networks, competitors may have difficulty usurping them. With regards to Bitcoin, not only does it enjoy strength in the number of active addresses, but it also has a considerable number of miners that secure the network by using computational power.

A competitor to Bitcoin would have to prize away these Bitcoin miners with a more profitable and attractive alternative. The Ethereum network finds itself in a similar position to Bitcoin, and competitors would have to offer something extraordinary to change the status quo.

Fraud and Money Laundering

The crypto market has seen its fair share of fraudulent activity, especially as cryptos gain more popularity across the globe. With interest levels in crypto increasing, fraudsters have created fake exchanges that aim to dupe unsuspecting crypto traders. The lack of security regarding fake exchanges creates a massive risk for investors. Although there are systems in place to curb this fraudulent activity, security remains a big problem in terms of counterfeit exchanges.

Crypto wallets are used to store your cryptocurrency, and many fake wallets have popped up. These fake wallets use malware to infect your device and aim to steal your passwords in order to access your information. Phishing scams are also popular amongst fraudsters that trick investors into thinking that certain websites or companies are authentic. They typically coax you into clicking on a link that redirects you to a fake page where your login details are required. Disclosing your login details on these fake platforms will enable fraudsters to access your funds with consummate ease.

Money laundering is another big concern in the crypto market as it is a system of unregulated cross-border space that has the potential for funds to move covertly. Much noise has been made about the anonymity of transactions, the difficulty in tracking their movements, and the lack of control. While digital assets do not actively promote illegal activity, their anonymous nature makes them an ideal platform for money laundering.

Tips to invest in cryptocurrency safely

If you are looking to invest in cryptos, you can follow these tips to get you started.

Diversify your portfolio

Research exchanges

Prepare for volatility

Bottom Line

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