What are the dangers of cryptocurrency?
The world is trying to understand what to do with the newly popular cryptocurrencies that have emerged. 2017 was a breakout year as prices soared higher. All sorts of investors jumped in to speculate on their future – a theme that repeats itself. However, before you jump in, it’s wise to understand what it is and the risk involved.
But just because there’s a new currency out there it does not mean it’s infallible. Although it’s designed to be more secure through encryption, there are still risks of using cryptocurrency.
The risks of trading cryptocurrencies are mainly related to its volatility. They are high-risk and speculative, and it is important that you understand the risks before you start trading.
- They are volatile: Unexpected changes in market sentiment can lead to sharp and sudden moves in price. It is not uncommon for the value of cryptocurrencies to quickly drop by hundreds, if not thousands of dollars.
- They are unregulated: Cryptocurrencies are currently unregulated by both governments and central banks. However, recently they have started to attract more attention.
- They are susceptible to error and hacking: There is no perfect way to prevent technical glitches, human error or hacking.
- They can be affected by forks or discontinuation: Cryptocurrency trading carries additional risks such as hard forks or discontinuation. You should familiarise yourself with these risks before trading these products. When a hard fork occurs, there may be substantial price volatility around the event, and we may suspend trading throughout if we do not have reliable prices from the underlying market.
The major risks with cryptocurrencies are as follows and need to be kept in mind before opting for one:-
1. Instability of Values
The volatility in the pricing of cryptocurrencies is intimidating and threatens widespread acceptance. Currencies need to be stable and reliable to earn trust and be widely used.
Using cryptocurrency such as Bitcoin to purchase goods and services carries with it a certain amount of risk. Since its inception, it has gone from zero to nearly $20,000 for a single Bitcoin in December 2017.
However, the current value, as this post is written, places it at around $19 K per Bitcoin. Still, this is not the first time such extreme changes in price have happened. But the problem is that these wild changes in value increase the risks of using cryptocurrency.
If you’re using it to purchase something expensive, what if the price drops before you close the deal? You may have to fork over more cryptocurrency than you were expecting. Furthermore, if values rally and rise later it could leave you with buyer’s remorse and huge losses.
2. Cyber/Fraud risk
Since Cryptocurrency is essentially a cash currency it has attracted a large set of the criminal community; these criminals can break into crypto exchanges, drain crypto wallets and infect individual computers with malware that steals cryptocurrency. As transactions are conducted on the internet, the hackers target the people, the service handling and storage areas, through means such as spoofing/phishing and malware. Investors must rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect purchased cryptocurrencies from theft.
Moreover, cryptocurrency is highly reliant upon unregulated companies, including some that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions. Furthermore, the software needs to be regularly updated and maybe suspect at times. Sourcing the blockchain technology to vendors may result in significant third-party risk exposure.
There is very little in the way of recovery, If the keys are stolen to a user’s wallet, the thief can fully impersonate the original owner of the account and has the same access to the money in the wallet that the original owner has. Once the Bitcoins are transferred out of the account and that transaction has been committed to the block chain, those monies are lost forever to the original owner.
3. Lack of Acceptance
A lack of acceptance is another of the risks you face when you use cryptocurrency. There are at least a couple of reasons for this.
Some businesses fear cryptocurrency due to the changes in value it has experienced. This makes them reluctant to accept it as a form of payment. If you try to pay for purchases strictly with cryptocurrency you could end up out of luck with some businesses.
Additionally, cryptocurrency is not classified in the U.S. and many countries as legal tender. This fact alone causes some people and businesses to fear it, mistrust it, and not accept it.
It appears that some foreign countries also have a lack of acceptance. Not all of them recognize digital currency as a form of payment either. If you’re making a complicated foreign purchase, this fact could make it even messier to complete.
4. Operational risk
With a centralized clearinghouse guaranteeing the validity of a transaction comes the ability to reverse a monetary transaction in a coordinated way; no such ability is possible with a cryptocurrency. This lack of permeance is further demonstrated as Bitcoin accounts are cryptographically secured, access to monies contained in an account almost certainly cannot be restored if the “keys” to an account are lost or stolen, and subsequently deleted from the owner.
5. Business Risk
Loss of confidence in digital currencies: The nascent nature of the currencies subjects them to a high degree of uncertainty. Online platforms have generated a large trading activity by speculators seeking to profit from the short-term or long-term holding of digital currencies. Cryptocurrencies are not backed by a central bank, a national or international organization, or assets or other credit, and their value is strictly determined by the value that market participants place on them through their transactions, which means that loss of confidence may bring about a collapse of trading activities and an abrupt drop in value.
6. Experimental phase risk
It should be noted that the concept of cryptocurrencies itself is innovative - there are no historical data and experience that allow you to assess how much you can trust it. Bitcoin, like other cryptocurrencies, is still under development. Thus, something completely unexpected could happen to it, which invariably happens at the development stage not only with economic objects but also with experimental technologies. However, being the most actively used cryptocurrency, it is less “experimental” than other counterparts. In addition, relative to traditional assets, its level can be assessed as high because this asset is not intended for conservative investors.
Is crypto safe?
There are certain risks present in the crypto market that are not as prevalent in traditional financial markets, such as those for stocks and bonds. Cryptocurrency exchanges have been prone to hacks and other criminal activity. These security breaches have led to sizable losses for investors who have had their digital currencies stolen, never to be seen again.
Frauds and scams are also rampant in the crypto industry. Hypesters who promise investors dazzling returns are typically unable to fulfill their lofty promises, as they far too often peddle fool's gold rather than legitimate blockchain projects. Investors who buy into the hype can suffer brutal losses when these projects eventually fail.
Moreover, it's not as easy to store cryptocurrencies as it is to store stocks or bonds. While exchanges such as Coinbase make it fairly easy to buy and sell crypto assets, such as bitcoin and Ethereum, many people don't like to keep their digital assets on exchanges, due to the aforementioned risk of cyberattacks and theft. Instead, some prefer offline "cold storage" options, such as hardware or paper wallets. But cold storage comes with its own set of challenges, namely the risk of losing your private keys, which would make it impossible to access your cryptocurrency.
Lastly, it's important to understand that cryptocurrencies and blockchain in general are cutting-edge technologies. While that makes them exciting, it also increases the risks for investors, as much of this tech is still being developed and is not yet proven in real-world scenarios.
That said, the blockchain industry is growing stronger every day. Much-needed financial infrastructure is being built -- such as institutional-grade custody services and futures markets -- and that's giving professional and individual investors the tools they need to manage and safeguard their crypto assets. Financial giants such as PayPal and Square are making it easier to buy and sell cryptocurrency on their popular platforms. And many other major corporations, such as MicroStrategy and Square, have collectively invested hundreds of millions of dollars into bitcoin and other digital assets. These companies clearly see the potential of cryptocurrency -- as do a growing number of individual investors -- and they believe the industry has matured to a point where investing sizable sums in crypto assets is safe.
What is the future of cryptocurrency?
Predicting what will happen with cryptocurrency is not easy. But, what most investors want to know about is finding the right time to invest in crypto. Well, is this the right time to invest in bitcoin? There are different opinions, and some have been skeptical. However, with bitcoin halving happening this year and bitcoin bouncing back to $19K, it does not seem like you will get into a huge risk if you invest now.
The significance and role of cryptocurrency have expanded substantially. From mere speculation to an investment instrument –the cryptocurrency industry is thriving. Moreover, its use cases are not restricted to financial transactions only. Instead, digital currencies with different applications in various industries have already transpired.
Over the last three years, prominent organisations have started offering services pertaining to the cryptocurrency industry. With that, institutional investors, hedge fund managers, and investment managers have started developing an interest in cryptocurrencies. Investors are now keen to include digital assets in their diversified investment portfolios.
Easing regulations surrounding cryptocurrencies
Over the last two years, a number of governments have changed their stance towards cryptocurrencies and digital assets. Germany’s Financial Authority classified Bitcoin and other cryptocurrencies as official custodians.
Governments have now started drawing regulations to provide a legally compliant environment for trading and investments in cryptocurrencies.
In the near future, we are likely to see countries drawing regulations pertaining to the use, trade, and storage of digital currencies.
Cryptocurrency exchange hub
As all cryptocurrency trading and investments are gaining rapid interest, it would create an imminent need for supportive infrastructure. The current methods of digital cryptocurrency trading are not sustainable for the longer-term owing to discrepancies in methods and processes.
In the near future, we are likely to see the emergence of exchange hubs catering to providing multiple solutions all under just one platform.
Innovation with Crypto Tokens
In the upcoming years, cryptocurrency tokens are likely to be integrated with other technologies and innovations. This includes AI, smart contracts, and the Internet of Things (IoT). Tokens will be used to provide supportive infrastructure, build smart tools, and infuse automation by integrating innovative technologies.
For instance, smart locks (an IoT device) can only be unlocked if an owner deposits cryptocurrency tokens into a specified wallet. A smart contract with encoded rules can further automate this system.
The potential of digital currencies empowered by blockchain technology is unprecedented. Looking at the current advancements and projects that are underway in the crypto and blockchain ecosystem, we are going to witness disruption in multiple industries. Even the current stats, analysis, and figures reveal that blockchain will be one of the greatest innovations of this century.
Owing to its advantages and subsequent developments in the cryptocurrency arena, the perception of this entire industry has transformed. The question has changed from ‘Is there a future of cryptocurrency’ to ‘What is the scale of implications of cryptocurrencies on our future’.
The Bottom Line
There is no doubt that cryptocurrencies are here to stay as technology advances. Public acceptance and confidence will take some time, but the risks will remain the same, some appearing to be more material and elevated than before for both the currency and the business.