Issues & Risks With Cryptocurrency Investing
The rapidly growing popularity of cryptocurrency has resulted in the sudden influx of investors looking to also benefit from the boon. Unfortunately, many of these folks have little or no idea of the risks involved.
For many, the extent of their knowledge comes from recommendations made by friends and colleagues who encourage them to buy certain tokens. Investing in cryptocurrencies can be financially rewarding, but you should do with full knowledge of the risks involved.
This way, you won’t end up losing your shirt in the event of a bearish market –like it is presently- or investing in a poorly performing token.
Table Of Contents
- 1 Issues & Risks With Cryptocurrency Investing
- 1.1 1. Cryptocurrency Value Instability
- 1.2 2. Lacking Oversight
- 1.3 3. Exchange Shutdowns
- 1.4 4. Abundance of Scam Coins
- 1.5 5. Current and Possible Future Regulation Issues
- 1.6 6. Outright Banning of Cryptocurrency Trading in Certain Countries
- 1.7 7. Tax Implications
- 1.8 8. Security Risks Through Vulnerable Accounts
- 1.9 9. Transactions May Be Traced
- 1.10 10. Countries Creating Nation Cryptocurrency Tokens
- 1.11 11. Invasion of Corporate Entities and Their Token Creation
- 1.12 12. Token Shilling, Pumping and Dumping
- 1.13 13. Limitations in Currency Exchanges
- 1.14 14. Unequal Mining Benefits
- 1.15 15. Uncertainty About Market Sustainability
- 1.16 16. Harmful Vested Interests
- 1.17 17. FUD and FOMO
- 1.18 18. Easy Price Manipulations By a Single Entity
We have therefore, created a comprehensive guide to cryptocurrency investment risks to help you understand just what you’re getting into when you decide to invest in cryptos.
1. Cryptocurrency Value Instability
One of the biggest risks involved in cryptocurrency trading or investing is the frequent extreme price fluctuations. At the beginning of this year for instance, bitcoin was valued at over $18,000 USD. Now, it’s fluctuating between $6,000 and $7,500.
Ethereum that was priced at over $1,600, is now fluctuating between $300 and $400 per unit. That’s how volatile cryptocurrencies can be, and why you need to adequately prepared for these wild price fluctuations.
This is a perfectly normal occurrence in the market, and requires that you be patient and courageous enough to “hodl” –short for “Hold on for Dear Life”- and just stick through the short and prolonged dips if you want to make a killing when the currencies eventually bounce back.
2. Lacking Oversight
Here’s the truth about the crypto market right now: it is still the wild wild west. Anything can and does happen here.
Everything from scam coins to pump and dump coins, token founders absconding with people’s monies, with zero penalties and so much more. All of these are possible because there’s largely zero oversight.
Sure, some countries are beginning to regulate crypto trades, but that’s a very minuscule number. The larger part of the community is completely unregulated. Anything flies here. Remember that.
3. Exchange Shutdowns
In the past, exchanges have just upped and closed down their operations, cleaned out the resident wallets on their platform and walked away without any warning to its investors and populace.
This has happened and can still happen in the future. Of course, things are becoming a little more stable and the likelihood of that happening is slimmer now.
But still, that can happen, which is why you should only trade on the more popular and reputable platforms and exchanges.
4. Abundance of Scam Coins
Less than 200 of the 1,500+ cryptocurrencies available are legit and have a valid use case. The others are tokens designed to just make a lot of money for their creators. The founders just create them for the purpose of making some money off gullible investors.
These coins are often very cheap – think less than 1 cent per token in many cases – and attractive to investors who just want to buy, hold and watch it appreciate so they can double their funds.
To reduce your risk of falling for these scam coins, just stick to the top 100-200 cryptocurrencies listed on Coinmarketcap. This is not to say there are no scam coins in the top 200 tokens, it’s just they are quite few.
5. Current and Possible Future Regulation Issues
The entre cryptocurrency market sprung up from bitcoin’s decentralized, privacy based and trustless blockchain tech. For many, this is the reason they are interested in cryptos.
But, with the cryptocurrency market cap growing phenomenally –was valued at over $750 billion at one point this year- chances are that countries and governments would be looking regulate the industry.
And as you know, regulations can influence pricing and token value, as people would be very likely to pull their funds, resulting in a price free fall and rapid market disintegration. So, keep your eye open for regulations particularly from major player countries like the US, China, and South Korea.
6. Outright Banning of Cryptocurrency Trading in Certain Countries
Certain countries like China are going after cryptocurrency traders, investors, platforms and ICOs in their countries. The government is currently targeting Chinese residents who trade overseas by scrutinizing their bank transactions and freezing their accounts.
In fact, China banned cryptocurrency exchanges in September, 2017, forcing investors and traders to do their business over the counter or offshore. Similar occurrences can happen in any country if the government deems it too risky and dangerous for its citizens to continue participating in the market.
7. Tax Implications
In the US for instance, you are expected to pay tax on your cryptocurrency profits. Proceeds from cryptocurrency trading and investments are grouped under the personal income category. So, you would have to declare it as personal income and pay taxes on it.
The law differs for every country. Check your country’s tax laws to see what your country says about it.
8. Security Risks Through Vulnerable Accounts
Cryptocurrencies are stored in wallets. These are usually grouped into
- Hot wallets
- Cold wallets
Hot wallets are usually online and easily accessible. They could be in the form of your desktop wallet, online wallet, or the wallet on your favorite cryptocurrency exchange. As long as it can be easily accessed for trades and withdrawals, these are considered hot wallets.
The hot wallets tend to be the most vulnerable to hack attacks. Hackers can either hack your computer or account or trick you to install a key logger to track your key strokes and steal your tokens.
There’s also this new trick where social media accounts bearing a similar name to the official account of token founders will ask you to send them a certain amount of tokens, and they’ll repay senders by sending them back 5x to 10x of their token amounts.
If you’ll be leaving your tokens on an exchange platform, make sure to enable 2FA and use a very strong password to access your accounts.
Bottom line, you need to institute serious security measures like using alphanumerical passwords, two factor authentication (2FA) and keeping your private keys safe.
9. Transactions May Be Traced
One of the major appeals of cryptocurrency is its privacy based and anonymous technology. Transactions can be anonymously sent and received without anyone knowing who sent what or to whom.
The problem with that though, is that not all tokens are able to do this. Many tokens have a ledger on the blockchain detailing transactions that were executed. This means the IRS can actually investigate your transactions during your tax filing to see if you sent in the right details.
So, if you’re looking to hide your transactions and do a lot more private transactions, you would have to actively seek out those cryptocurrencies.
10. Countries Creating Nation Cryptocurrency Tokens
Countries like Ecuador, Venezuela, Tunisia, China and Singapore have launched their own cryptocurrencies. Other countries like Estonia, Sweden, Russia and japan are considering the possibility of launching their own national cryptocurrency tokens too.
This implies that once these countries start adopting their cryptos, they may end up banning or limiting the exchange and trades of other cryptocurrencies, which could have significant effects on their value.
11. Invasion of Corporate Entities and Their Token Creation
In a manner similar to national cryptocurrencies, some companies have already created and launched their own tokens, while others have just started considering creating their tokens.
ICOs are clearly looking like the next popular fundraising strategy for businesses, and may quickly replace IPOs. With IPOs, there are restrictions and market regulations to deal with.
But with ICOs, there’s literally no regulation to bother with, which is why it’s looking very appealing to these companies.
12. Token Shilling, Pumping and Dumping
One of the major pitfalls to avoid in cryptocurrency investing is shill coins that are only used for pumping and dumping.
In case you don’t know what that is, pump and dump in cryptocurrency trading is the process of suddenly flooding a token with lots of buys, temporarily driving up the price, and then selling them off when the target price is reached.
This is usually done by a few individuals or organizations with a lot of cash. The only way to profit from this is to know how to spot these rising trends, buy in early and sell when the price is high. This, however, isn’t a viable investment strategy as it only works for the very short term.
13. Limitations in Currency Exchanges
There are very few crypto exchanges that list all the coins and make them available for trading. Some platforms don’t list certain tokens, which means you’ll have to go seek out some of those exchange platforms to buy or trade those tokens.
The problem with this is, some of those exchanges may have lax security, can close down at any time, and can result in a loss of funds. As much as possible, you want to stick with known exchanges with a history of bulletproof security and good reputations. This way, you know your capital or investment is safe.
14. Unequal Mining Benefits
Some cryptocurrencies award people differently than others. For instance, it isn’t unusual to find miners from one country or geographical location earning more than miners from another location.
This can generate feelings of resentment, resulting in many miners abandoning certain tokens for others. If that happens, it means there might be fewer of those tokens in circulation, it could result in less interest, depreciated value and the eventual neglect of that coin.
So, while the availability of the miners isn’t a major consideration for when investing in cryptos, you just want to make sure that it’ll still be in circulation for as long as humanly and mechanically possible.
15. Uncertainty About Market Sustainability
Let’s be honest, the cryptocurrency market is new, unstable and has no clear direction. This means that it’s a bubble that will blow up in our faces one day or a valid market that will be around for a really long time.
The bottom line is we don’t know how long this will last, even if it will. So, if you’ll be investing, do so with that thought at the back of your mind. We’d like it to be more stable and predictable, but that probably won’t happen for a while.
16. Harmful Vested Interests
As earlier stated, some companies are creating tokens as a way of generating some quick cash. There are also others who consistently pump and dump tokens.
The point is that the nonexistent regulations makes the market and tokens very vulnerable to manipulations. There are some individuals who create tokens to scam investors, and others who do so for sinister purposes.
Whatever the case, do the smart thing and always invest in well-established tokens with visible teams and a transparent operation.
17. FUD and FOMO
In cryptocurrency trading, the terms FUD and FOMO respectively stand for Fear Uncertainty and Doubt, and Fear of Missing Out. The first can be caused by rumors, negative news items, unfounded claims and so much more.
The bottom line, is this often results in panic selling, which negatively impacts the price of your tokens. The second happens when everyone suddenly starts talking about a crypto token and there’s sudden interest as well as cash flow towards the coin.
These two events have often been responsible for the collapse of many crypto tokens and loss of investor capital. The best way to stay immune to both is to research your intended token(s) properly, so that when these events start happening, you would see them for what they are and decide if you want to HODL and wait until your coin moons or dump and walk away.
18. Easy Price Manipulations By a Single Entity
Early this year, Coinmarketcap removed Korean exchanges and stopped using their data. The removal of these Korean exchanges effectively halved the price of cryptos across board, resulting in huge value losses.
Unfortunately, the market still hasn’t recovered from that event. The point is that the market is still susceptible to price manipulations by influential entities. All it takes is for some of these data pools to make a few adjustments and the market will tumble right down.
In the final analysis, you should understand that cryptocurrency investment is very high risk. It is possible to 10x your investment within a few months –like many did towards the end of last year- or lose everything in a few days.
If you are risk averse and prefer a more stable portfolio, just invest in more stable coins or projects you feel and can prove have great viability. Good luck and may your investments moon.