What are the risks of investing in cryptocurrencies?
It will not have escaped your notice that the crypto market has experienced unprecedented growth in the last few months. Many investors are interested in the coins and want to benefit from this unprecedented growth. Now it so happens that there are a number of risks involved in investing in cryptocurrencies.
Is investing in cryptocurrencies safe?
Although there are a number of risks involved in trading cryptocurrencies, it is indeed possible to invest safely in the coins. The risks are only important to keep in mind as an investor. Without knowing the risks, it is actually not possible to make a good investment choice.
The biggest risks of investing in cryptocurrencies
OK, so there are a number of risks associated with trading cryptocurrencies. Which risks are these exactly, you might ask? We have made it a bit easier for you by listing the biggest risks of investing in cryptocurrencies below. There is no real order to these risks. By the way, don’t let this stop you from investing in cryptocurrencies, all kinds of investments involve risks:
Bitcoin and cryptocurrency is not regulated
Perhaps the biggest risk involved in trading cryptocurrencies is the fact that they are not a regulated type of asset. Bitcoin investments and crypto in general exist in most countries as a kind of unregulated form of investment. Very few countries have a fully regulated crypto market like Singapore or Switzerland. Therefore, there is a risk that investing in Bitcoin and crypto will later become criminalized if a country decides it is illegal.
Although the chance of this happening in the Netherlands is small, we do see that some countries are trying to make investments in cryptocurrencies illegal. For example, China has had a ban on cryptocurrency investments for a long time. One way to be sure is to be aware of the regulatory events in your country. We strongly recommend that you read up on these matters and stay informed. You can do this for by reading financial magazines or by joining forums for crypto investors in your country. That way you can be sure you won’t miss anything about the latest developments.
Cryptocurrencies have problems with wallets
Another risk of investing in cryptocurrencies is the fact that you might encounter problems with the use of wallets for storing the coins. If you type in an account number incorrectly with normal banks, the bank server will recognize the error and the transaction will simply not go through. Or if you type in the wrong number, the bank will show the name of the person who belongs to the account before you can continue. This way you can be sure that your money always reaches the right person.
Unfortunately, this is not possible in the blockchain. The only thing an exchange or wallet can tell you, is that a wallet address belongs to the network and is therefore a valid wallet. It does not tell you who that wallet belongs to or what exactly is in it.
This may mean that you can accidentally send cryptocurrencies to a wallet that has no owner. If this happens, then you will lose your money, the transactions cannot be reversed. In fact, this is how cryptocurrencies are often lost. Some projects even use this method to bandage coins. If a developer wants to reduce the stock of a cryptocurrency, he sends it to a wallet address without an owner. This and the fact that transactions cannot be reversed is a major disadvantage of investing in cryptocurrencies.
Cryptocurrencies are not cheap as a means of payment
Another risk is that cryptocurrencies will not be used as a real means of payment. This is mainly due to the fact that cryptocurrencies often charge substantial costs for processing transactions carried out through the network. Of course, credit card providers and banks also charge costs, only in the case of cryptocurrencies these costs are not known in advance. There are of course traditional costs, such as the costs charged by exchanges for their services. But because blockchains work through a network of various participants (also called Peers), there are also costs associated with the use of the network.
In the Bitcoin blockchain, a fee must be paid for each transaction sent. The extra money encourages the miner to pick up the transaction and add it to the next block. In times of intensive use, these transaction fees can become expensive and reduce profitability.
This is of course not convenient if you want to use cryptocurrencies as a digital currency. You don’t want to queue for hours before it is finally your turn to have your transaction processed. Although there are some cryptocurrencies that manage to overcome the problems of Bitcoin, the fact is that there are costs involved in using cryptocurrencies that are not known in advance. This is a big risk for investors speculating on the future of the project.
This is a risk that is particularly relevant to Bitcoin, although it also applies to the other types of digital currency that use miners to mine the blocks. It is a risk that comes with pools. You can think of a pool as a group of miners who pool their computing power to make mining BTC more profitable. A pool must be controlled by a group of miners because the mining software has some limitations.
The problem is that those who control the pool can hide from the rest when they successfully mine a block. In this way, the rewards of mining only go to those who are aware and the rest have just spent their computing power for nothing. This is a risk that fortunately is getting smaller and smaller now that there are various cryptocurrencies that make it impossible to hide the blocks. However, it is a risk that still exists for Bitcoin itself.
Cryptocurrencies are susceptible to manipulation
The next risk is that digital currency may be susceptible to manipulation. There are big investors who bought Bitcoin when it was only worth a few cents of a dollar or a few dollars. They bought thousands of BTC at that time, and now they have enormous power over the rest of the supply. They can influence the price of BTC by selling just a few of their coins and buying more after the price has dropped to a lower level.
Bitcoin investing involves a high degree of market manipulation. If these large investors are constantly driving down prices, then you could lose a lot of money as a beginner investor. Unfortunately, there is little that can be done about this, as these people simply have too many coins in relation to the rest.
Cryptocurrencies may get a hard fork
Another risk is that it is possible that a certain type of cryptocurrency will suffer a hard fork. A hard fork is a change to the network that actually creates a kind of new project. The network splits in two after a fork and its computing power is permanently divided among the miners who take over one split from the other.
Blockchains are very vulnerable after a split. This is also the moment when attackers try to steal money from the network that has become less secure. We also call this a 51%-attack. A group of miners takes control of more than half of a network and uses this power to double-dip coins and steal money. Although this does not happen regularly, cryptocurrencies that run on the blockchain are susceptible to it.
Cryptocurrencies are very volatile
The last risk of investing in cryptocurrencies is the fact that the coins can be regarded as very volatile. This means that the prices can go up and down considerably, sometimes a lot in a very short term. Especially in the short term the price fluctuation can be in the double digits, this is something which actually doesn’t happen regularly in the financial world.
Owning Crypto can be very risky if you do not know how much it will be worth in a few hours. Of course, there is an advantage to this, as it is quite possible that the price will increase considerably in the short term. If you choose to invest in cryptocurrencies, it is necessary that you don’t need the money in the short term and that you can really miss it. If you put all your savings in it, which you had put aside for your studies, then it might blow up in your face.
You can also choose to enter on a staggered basis: you then buy crypto coins at different times, which means you enter at the top and at the bottom.
Is it wise to invest in cryptocurrencies?
If all went well, the above has ensured that you have learned more about the risks associated with the trade in cryptocurrencies. Of course, these risks do not imply that it’s totally unwise to invest in digital currencies. As we already indicated, it’s true that every investment comes with certain risks. However, you must be aware of these risks and that you know what’s involved in investing. Be sure to visit this site to learn much more about investing in cryptocurrencies!