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Like any other investment, crypto investments also have their risks. It would help if you considered all of them before you started investing. This will help you navigate the challenges of the crypto space and maximise your returns and profits from your investment.
Here’s more about them in detail.
The following factors might make cryptocurrency a risky investment. They are as follows:
Cryptocurrencies are decentralised as they do not have any central authority backing. This may seem like an advantage that the central governments, banks or other financial institutions will not have any influence on the functioning of your digital assets. But, it has its problems too.
The value of a cryptocurrency depends on its demand and supply. Also, there is no authority backing the value of the digital currency. Hence, investors can be in a fix if any complications related to transactions and ownership arise.
In the case of cash, it is physically exchanged between two parties. Hence, there is proof of transaction. When a digital transaction is backed by a central authority or a reputed financial institution, that transaction is also verified and approved.
Thus, in both these cases, if any problems arise regarding settling deposit and debt claims, this backing and proof of transaction come in handy. Thus, any legal issue can be taken before a court of law.
In the case of cryptocurrencies, the transactions are verified by the miners on the blockchain. However, due to its decentralised nature, any fraud or legal issue regarding it will not get any benefit from the law.
Another great concern regarding crypto investing is its volatile nature. The investment market, by nature, will rise and fall. However, any change in the financial market trend will affect the value of crypto more than any other asset.
This may benefit some investors, but if you are starting, this factor can be problematic. It may so happen that the price of your crypto assets can rise or fall within hours, leaving you with a hefty profit or in deep loss.
3.Cybercrimes and money laundering
If you are a crypto user or investor, there is a high chance of exposure to phishing attacks, malware, and illegal trading platforms. Using third-party software is also a very risky thing to do in this case. Users also tend to store their “private key” on their computers. This can also be quite dangerous. If a hacker gains access to your computer, they can easily use your “private key” to access your account.
Cryptocurrencies are a haven for money launderers. For fiat currency, a person must give identity proof to a bank to use its services. But in the case of crypto, the platform only needs the wallet address of the sender and receiver to transfer funds. The lack of a central authority also plays a huge role in this matter.
Money laundering acts may not hamper the value of your digital asset. However, if you are a victim of a financial crime, you will not be able to take any legal action to get justice. Moreover, if anyone hacks the exchange holding your tokens, there is no standard protocol to recover those assets.
4.Double spending attacks
On a blockchain, if a user controls more than 50% of the computing power, there is a high chance of double-spending attacks. This generally happens in cases of new cryptocurrencies or forked ones.
Do not accept unconfirmed transactions if you are a miner on such a network. It may lead to a double-spending attack. Double spending leads to inflation as the attacker creates a new amount of cryptocurrency that does not exist. This leads to a devaluation of the digital currency in relation to monetary units and reduces its value as an asset.
A hard fork is a situation when most of the coin holders of a particular cryptocurrency want to upgrade or change the coin protocols. Creating a new coin with updated rules is the standard practice in such cases. Users of the old coin can get a completely new asset or a coin swap.
It may not seem to be of any harm to you as an investor. But remember that the new coin will not be immediately supported on major crypto wallets or exchanges.
If you are a part of a crypto community that has the chance of getting a hard fork, find out what will happen to your asset after the fork is implemented. You can plan accordingly based on that.
Cryptocurrency investment has its risks, but it also has its rewards. You can learn a lot from this market and use this knowledge to improve your investment strategies in the future. However, when you are just beginning, start with an amount you can afford to lose. This way, you will safeguard your financial stability while making crypto investments.