Although we have discussed the risks of cryptocurrencies from time to time, some of the factors require additional explanation. In this article, I’ll try to elaborate on the risks of cryptocurrency and will try to answer the question: is it safe to invest in cryptos?
Volatility
Volatility is the rate at which the price of a security increases or decreases for a given set of returns in a particular time. Unexpected changes in market sentiment can lead to sharp moves in price.
In the world of cryptocurrencies, this is even more profound since unlike traditional equity markets where the share’s worth is directly linked to the underlying asset, cryptocurrencies don’t have any underlying asset (they’re digital). It’s not uncommon to see the value of cryptocurrencies fluctuate by a large margin (which range between hundreds to thousands of dollars even!).
Image Courtesy: Coinbase
Nature of the transactions
In a cryptographic network, transactions are highly secured with practically no chance of being decrypted by present-day algorithms. Even if it is possible, there’s no system that could generate such computational prowess to be able to decrypt the transaction information. All this makes it a better option than the current solutions but there’s a challenge. Due to such a complex system, it is impossible to detect if the system is being used for criminal purposes. Moreover, a lot of terror organizations have started to adopt cryptos for their criminal activities since it easily evades all the central authorities. While you can trace the transactions, it’s difficult to determine the source or destination.
Susceptible to errors, hacks, thefts, and technical glitches
Although cryptocurrencies’ basic structure is very secure, its ownership is still not as secure as it should be. It is not uncommon to see events crypto stealing by hackers, or being lost due to data drive failures. Due to their decentralized nature, if the cryptos are lost, the chances of getting them recovered are second to none. These all add up to its volatile nature.
In fact, reports suggest that 3 to 4 million Bitcoins are permanently lost, because people have lost their passwords or hard disks.
Forks or discontinuation can affect cryptos
Cryptocurrency trading carries additional risks such as hard forks or discontinuation. Familiarization is required because when a hard fork occurs, there may be substantial price volatility around the event, and trading could be suspended throughout the underlying market.
All these could easily fret you from investing your hard-earned money in such an unregulated and volatile market.
Conclusion: Is it worth investing in cryptocurrencies?
Although it is a get-rich-quick scheme, its highly volatile nature may prevent a lot of people from investing in it. But if you really want to give it a go:
- Have thorough research and understanding about the mechanism of exchanges.
- Converse with some experienced investors to have an idea about buying/selling/trading of the coins.
- Be prepared for varying fluctuations of cryptocurrencies.
- Ensure that you keep the passwords safe for your cryptocurrencies, and don’t store them in exchange. If possible, invest in a hardware wallet, which is more secure.