About a year ago, the crypto world was full of hype and excitement with the price of Bitcoin breaking record highs as everyone was hoping for and looking forward to a crypto utopia. Fast forward a year later, and the hype seems to have gone down. Nevertheless, cryptocurrencies are here to stay. There is more to Blockchain in the future than what is talked about in the headlines. Unfortunately, it is true that there are many investors who have lost significant amounts of money from investing in the wrong cryptocurrencies or Blockchain startups. The Blockchain industry is still an emerging market. This causes huge risks that entrepreneurs and investors. So which dangers of crypto should you remain aware of?
Market volatility and price fluctuations
Since the beginning of 2018, the volatile nature of the cryptocurrency market has been one of the biggest obstacles to overcome. For instance, Bitcoin’s price has faced extreme fluctuations. Namely, its price tag has changed from USD 20’000 in January to around the USD 6’000 by the end of October. For most investors and speculators who bought Bitcoin at its highest, the current price drop has meant significant losses. This example shows that given the sheer number of cryptocurrencies all over the world, there is a good chance that most won’t survive another year. With them, those who have failed to see the dangers of crypto that they have invested in are losing their money. Yet it is hard to distinguish the cryptocurrencies and tokens that will be successful from the one that will fail.
Difficulty in evaluation
Cryptocurrencies are like virtual coins or digital gold. On one hand, the scarcity aspect of the coins enables them to have value through supply and demand principle. On the other hand, the fact that transactions can take place without regulatory bodies is a huge problem when it comes to determining cryptocurrency’s value. This presents a unique problem that investors would definitely want to avoid. One of the dangers of crypto is that investing into Blockchain is nothing like investing in stocks and company shares. The difference that investors see immediately is that is much easier to establish value while buying publicly traded stocks. This is because value investors are able to use stock price ratios and other profit, growth, and cash flow metrics to determine the actual value of the stocks. Bitcoin and other cryptocurrencies, on the other hand, still have an immature market with limited liquidity. Therefore, most of the value determination is based on speculative principles.
Low barrier of entry with a narrow exit
The good thing about cryptocurrencies is the fact that they have essentially lowered the entry barrier into the world of finance and trading by democratizing most aspects of finance through decentralized ledger systems. However, with over 1600 coins and tokens on the market so far, it is harder to exit the market once you have your funds locked with certain ICOs/cryptocurrencies. For this reason, most investors get caught up in market panic when they end up selling their coins at a loss. A low entry barrier also gives way to volatility.
For those who choose to hold or store their coins on the exchange, the risk of losing money is even greater. Over the years, there have been some exchanges that have led crypto investors to lose money. In short, it happened due to theft through hacks on the vaults of the exchange. In fact, reports indicate that over $1 billion have so far been lost because of hackers since the beginning of 2018. With over 27 percent of exchanges under attack by hackers, it is recommended that you withdraw your cryptocurrencies and tokens to your own private wallet as soon as you buy them from the exchange. Additionally, even with a dedicated personal wallet, it is easy to lose the wallet by simply misplacing it. Even though the SEC has acknowledged the need for funds management with licensed custodians to act as middlemen in case of lost private and public keys, there is still much that needs to be done.
Susceptibility to arbitrage trading
For investors who do not have access to the most recent and relevant information, falling victim to arbitrage trading is a real risk. In fact, regulators such as the SEC have been concerned about the misalignments in the crypto economy. Such misalignments can easily be taken advantage of to hurt novice investors. The trade volume is relatively low in case of cryptocurrencies. That is why regulators believe that most of the price swings originate from arbitrage buying and selling by wealthy individuals. At the end of 2017, the price of Bitcoin saw a 30 percent swing in a matter of hours. This ultimately led to network congestion on the Bitcoin Blockchain network, which in turn caused some exchanges to shut down. To solve the problem, the SEC has suggested measures that will prevent exchanges from shutting down due to high levels of arbitrage trading.
Because of their decentralized nature, cryptocurrencies often don’t belong to a tangible asset class. That is why one of the main dangers of crypto is that making mistakes while transferring funds from one digital wallet to the other can lead to fatal losses. The catch is that these transactions are irreversible and not protected by the government or financial institutions. Once you make a crypto transaction, it is practically impossible to reverse it. You can even just accidentally spill some coffee on your digital wallet and end up losing your entire savings. Especially dangerous is when you do not have a backup. In its early days, the value of Bitcoin was still low. As a result, there were some crypto miners who lost millions simply because they sold or destroyed the laptops which they used to mine crypto. As a precaution, you should always store a backup in a safe vault.
Failures in technology
Many people agree that Bitcoin’s Blockchain technology has proven to be secure and risk-proof through cryptography. However, there is still a good number of cryptocurrencies whose Blockchain is not that secure. For instance, holders of Verge XVG lost over $1 million as a result of an unreliable Blockchain platform. As an investor, it is important to look out for stable Blockchain platforms to invest in, in order to avoid dangers of crypto. Keep in mind that not all Blockchain platforms are the same.
Investment is still a valid option
So, there you have it. In comparison to most investment vehicles, cryptocurrencies come with more fraud-related risks due to lack of regulations. There are many things that can go wrong: from pump-and-dump schemes to wars within Blockchain networks. However, with great risks come huge rewards. For those who have endured the tough times of the crypto space, there have been tremendous returns. As an investor, you need to understand the dangers of crypto and risks involved and come up with a long-term plan that will help you avoid making losses.