We can see an explosion of cryptocurrency in the last decade. While the digital currency has changed the way the world used to carry out its trades online, there are also many risks associated with it. The system is peer-to-peer, and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a blockchain. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation (at least from its fans’ perspective). As such, it has become attractive to those who want to get around governments or avoid paying taxes on their investments. Let us dig in and see these risks:
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One of the most common drawbacks of using virtual coins is that there is no central authority to control the value of these coins. The value totally depends on what the investors ascribe to them. Without any central authority, there can be many problems including the complications one has to contend with while carrying out digital transactions of any size.
Despite this risk, people can easily and securely conduct the transaction if they take every move in a calculated way.
Bitcoins often give rise to legal confusion
Sometimes, different parties involved in the transaction face legal confusion that arises mainly due to various basic differences. For instance, if two parties are located in two totally different geographical locations, they will definitely have to face the problem of legal confusion
Since bitcoins are decentralized, in most of the situations, both parties find themselves perplexed because of not knowing the legal procedure that is being followed at each other’s end.
Cyberattacks are common
When you are in the internet world, you can never get away with a cyber attack of any sort no matter how strong security you put into practice. For people with digital currency in their wallets, it becomes even more dangerous because it often leads them to suffer the loss of a hefty amount which is often almost next to impossible to retrieve.
People generally suffer from cyberattacks during the process of mining. Cyberattacks generally occur when people misplace their key. There are many trustworthy options to go with in order to prevent the loss due to hacking.
Too much reliance on technology
As a matter of fact, it is extremely difficult for us to do exchanges with digital coins if we don’t include technology. There are various systems involved when you are investing in bitcoins, putting them in digital wallets etc. In addition, there is no physical collateral to depend upon. Since the reliance on technology is too much, we often put our valuable assets at high risk. While we are depending on machines for buying and selling bitcoins, the machines can shutdown any time and disable the entire procedure.
The use of bitcoins is limited
Although cryptocurrency is the currency of the modern era and it seems to be very profitable to invest in it, there are many such companies that are aware of the risks associated with it and therefore, don’t use it. It is quite possible that you would like to spend bitcoins for online shopping but the targeted host won’t accept it. So, the limited use often makes your currency totally worthless.
1. Market manipulation
This applies mainly to exchanges where' real-world currencies are used to purchase cryptocurrencies like Bitcoin or Ethereum. Exchanges can be hacked by criminals who want to steal your money or manipulate the market through false trades and fake orders placed on their platform.
2. Credit Risk
This refers to the possibility that your broker won’t give you back your money when you sell your shares or coins. Credit risk is less common but can happen if there’s an issue with the company that issued your shares or coins. This happens quite often for companies listed on stock exchanges but not as much for cryptocurrencies like Bitcoin since there’s no central authority controlling them like a stock exchange does for stocks and bonds.
3. Volatility
The first risk of investing in Bitcoin is volatility – the swings in price of a cryptocurrency over time. This can be observed in the graph below:
What this means is that if you invest $100 today, it may be worth less or more tomorrow depending on how the price fluctuates. The good news is that there are plenty of ways to mitigate this risk.
Firstly, you can invest only as much as you’re willing to lose – this means that if your investment goes up or down, you won’t be financially affected either way because you haven’t risked too much money on it! Secondly, you can keep your investment short-term (i.e., less than one year). Thirdly, you can use stop losses when trading cryptocurrencies – this means setting an automatic sell order at a certain price point so if the market suddenly drops sharply, your trade will automatically close at that price point instead of continuing further down (or up!).
4. Limited liquidity
Bitcoin trading volume is very low compared to other financial assets such as stocks and bonds. This means that the market can be easily manipulated by a few large players who hold large amounts of coins. Even if you are not part of this group, your orders may get cancelled if there is no counter party for them on the other side of the trade or when bids/offers get filled up at higher prices than what you were willing to pay or sell at respectively.
5. Regulatory crackdowns
Several countries around the world have started imposing harsh regulations on virtual currencies and ICOs (Initial Coin Offerings). China banned ICOs in September 2017 and shut down domestic cryptocurrency exchanges in early 2018.
6. Theft and hacking
Cryptocurrency exchanges have become a prime target for cybercriminals. In 2018 alone, there were at least four major hacks at cryptoexchanges — Coincheck, Coinrail and Bithumb among them — which led to millions of dollars worth of digital assets being stolen from investors and traders alike.
