7 Risks of Trading Cryptocurrencies You Must Know
Did you just get alarmed by your best pal about cryptocurrency risks? Fret not! It is always good to know the flip side of anything before you start with it. Crypto trading is one such thing that is widely spoken almost by everyone, everywhere. As of March 2022, the global market cap of cryptocurrency has touched $2T as per Coin Market Cap’s report .
The remarkable rise showcases people’s interest in cryptocurrency trading. But not many are aware of the risks that come with it.
Here we are throwing some light on the risk of cryptocurrency trading and how to deal with it while also earning a fortune.
So, how risky is cryptocurrency?
Risks in cryptocurrency are caused due to certain factors that are characteristics of cryptocurrency itself. External factors like technology, marketing and regulation also contribute to the crypto trading menace. Let’s look into each of them in detail.
Bitcoin tops the table of cryptocurrencies though experiencing a fall of approximately 4% of late. Contradicting the bitcoin scenario, most of our friends earned a fortune out of BTC in 2021, as its value was skyrocketing at that point.
Unlike stocks, gold and silver, bitcoins or any cryptocurrency for that matter, don’t have a backing. They are purely built on demand-supply parameters. When there are more BTC investors, the price goes up candidly.
In short, expect the unexpected when you invest in cryptocurrencies.
2. Unregulated Space
Scott Duke Kominers, a Professor at Harvard Business School, during his interview with the gazette, stated that the latest innovations like wallet technologies and crypto exchanges are thinking aloud about consumers’ expectations from banking products and equities trading accounts. To keep the customer interface secured, and reliable while bringing down the scam and crime rates, there need to be regulations in the crypto space.
The statement is quite obvious and applies to the current situation as cryptocurrency risks are also evolving every day. Further, Dr. Kominers also gives a couple of other reasons why regulation is essential.
Cryptocurrency trading is similar to equity trading and is operated through a brokerage account at an exchange. The platform and applications involved are brand new and must be highly protected. There are multiple crypto platforms and products; regulation can bring visible competition among them.
Simply put, if a customer is swindled in a bank transaction, he/she can still appeal to the bank, but this can’t happen if the same customer loses money in a Bitcoin transaction.
Don’t you agree with Mr. Kominers on the risks of cryptocurrency and his reasons for regulating them?
3. Cyber Threats
While scams and crimes are clouding the savviness of cryptocurrency, cyber threats are coming along as another major risk. You will be startled to hear from CNBC that a huge chunk of crypto funds are being stolen from Defi Protocols.
Numerous operations are being funded by hackers and criminals on the dark web to rake in illicitly. A huge security breach attack took place with Bitmart, a crypto trading platform. It was reported that hackers withdrew about $200M worth of assets — $100M with cryptos on Ethereum and $96M with coins on Binance Smart Chains. The theft is undoubtedly associated with users’ hot wallets.
Not just this one, there are also a few other threats reported, attacks with Celsius Network and Poly Network to mention.
So, what does this imply? Blockchain, though being public, is making transaction tracing a cumbersome process for cyber security experts. Better late than never, using a cold wallet and changing your password at regular intervals can save your cryptocurrencies from such risks.
4. Technological Hazards
The above spoken cyber threat is one among the several technological hazards that the crypto community is experiencing quite often. Apart from this, crypto mining uses electricity (a) energy at a monstrous rate that eventually leaves a negative impact on the environment.
The underlying blockchain technology with cryptocurrencies operates on Proof-of-work and Proof-of-stake mechanisms that require dedicated infrastructure. To feed your imagination, it looks just like the supercomputers of the olden days. Yes, there will be computers running in several rooms continuously for nearly 18 to 22 hours a day. It all boils down to the electricity consumed; each processing unit in a crypto mining setup utilizes 350kWh and above on an average day.
To overcome this, Ethereum’s Layer 2 Solution has been implemented. Artists who are into minting NFTs (built on Blockchain Technology), take measures like tree planting and fundraising. Off-chain transactions are being encouraged and put to practice by some blockchains. The new measures might give some peace of mind to crypto enthusiasts about the cryptocurrency risks.
Where there’s a problem, there’s a solution too, isn’t it?
5. Market Risks
Crypto market is no different from stocks or equities. There are considerable amounts of market risks involved in cryptocurrency trading, too, just like how it happens with stocks.
To quote a live example, On the 11th of May 2022, TerraUSD plummeted to $3.24, approximately 90% down, making its holders poorer. The bullish was recorded as 17% when Terra became the third-largest stable coin in the market in April 2022.
Another fascinating thing: To your vague memory, cryptocurrencies started the bullish rally during the pandemic as people viewed this as an investment vehicle to help them sustain financial stability. The showstopper, Bitcoin, has quadrupled from 2019 to 2020.
Your defense: DYOR aka Do Your Own Research before capitalizing on any cryptocurrency. Also, be aware of these highs and lows of cryptocurrency market risks so that you aren’t surprised when the worst happens.
6. Frauds & Scams
There are times when cryptocurrency’s ROI has surpassed the returns from gold and other investment forms. Investing in crypto is becoming a FOMO to the current working as well as business class individuals.
On the flip side, until today, not even Google can help you find the person who invented bitcoin. We all know him/her as Satoshi Nakamoto, a real person not found or whose existence is still ambiguous.
Wait, there’s more to it. Scamsters have emerged, increasing the risks of cryptocurrency. Not a single day has passed without our community managers notifying the whole team in the chatbox about the scams that are happening in the blockchain and crypto community. What are the most common scamming methods?
So, stay alert. Get into communities only through personal references.
Fraudulent activities like price inflation and copying of crypto assets are also bound to happen. We recommend you read more about the dangers of cryptocurrency and digital asset forgery and widen your awareness.
7. Taxation Issues
Starting with El Salvador, a lot of world countries have legalized cryptocurrencies but also taxed them heavily. Let’s look into some examples.
Citizens of respective nationalities should watch out for these events and be aware of the taxation laws imposed or will be subjected to a violation of taxes for crypto assets.
Knowing how risky cryptocurrency is, there are still people in the world who have invested and are experiencing both the good and bad of it. How are they doing it?
Crypto investors have a sound investment strategy; they always focus on diversifying their portfolios and investing in quality ones. To get started with investing in cryptocurrencies, we recommend doing extensive research, staying updated about the market, and chipping in when the market is providential.
Begin with your research today by subscribing to bitsCrunch for all cryptocurrencies, NFTs, NFT forensics, and Metaverse-related news, and be future-ready!
Originally published at https://bitscrunch.com on May 16, 2022.