Interested in investing in cryptocurrencies? Or maybe you have taken the plunge? The opportunity is certainly enticing, but it is not without risk.
In barely a decade, cryptocurrencies have exploded. Today, the term is on everyone's lips and for good reason: there are more than 10 cryptocurrencies which are traded on a multitude of platforms, the number of which is increasing daily! What to attract investors. Among them, some have won considerable sums, benefiting from defying rates of return. It must be said that the market is atypical, subject to uncertainties causing it to fluctuate considerably.
Unlike fiat money, cryptocurrencies are traded digitally on a blockchain. This makes them reliable and secure because the information is anonymous and decentralized. It is simultaneously owned by everyone, a sort of public ledger. It does not rely on an intermediary, bank or other.
Cryptocurrencies are also not dependent on the monetary policies of central banks or governments. This makes them highly speculative because they are volatile. This volatility is a risk factor.
So here are the nine important risks associated with investing in cryptocurrency:
Volatility is one of the most basic indicators of an asset's financial health. For cryptocurrencies their volatile nature makes them highly speculative and this speculation in turn increases volatility.
Here is for example the price of Dogecoin over 1 year:
An increase of over 2%, followed by a loss of more than a third of its value. These dizzying variations are due to speculation.
The latter is the work of investors who make flash resale purchases being sensitive to the slightest negative sign of the market (Tweet, report, rumor,…).
This great volatility should be qualified. There are signs of stabilization in the market. The big players in trading and investing are acquiring increasingly significant stakes in most cryptocurrencies, thus reducing price volatility.
Cybercrime and hacking
Cryptocurrencies are held in digital wallets (“wallets”) and exchanged via trading platforms. Cryptocurrencies are prime targets for cybercriminals due to their anonymity. To hack wallets and trading platforms, criminals use various phishing techniques.
Individuals and businesses wishing to invest in cryptocurrency must follow strict internet security protocols to protect their assets. To understand how to protect your assets and your wallets, it is useful tobe aware of the latest fraud practices.
It is both one of the most attractive characteristics of cryptos but also a threat.
In the event of a dispute, the absence of a central authority can prove to be a major drawback. No central authority means no referent to turn to as is the case with the financial institution for fiat currencies.
As a result, most cryptocurrency investors are advised to trade through reputable platforms.
Because even though the majority of platforms have excellent customer service, decentralization makes resolving disputes almost impossible.
Risks associated with peer-to-peer transactions
A peer-to-peer (P2P) platform directly connects crypto buyers and sellers. On a P2P exchange, any cryptocurrency transaction is paid directly between the two parties.
These exchanges are one of the easiest ways to convert cryptocurrency into fiat currency.
However mistakes or negligence can lead to considerable losses. In addition, there is always a risk of scams and other frauds: a buyer refusing to pay or a seller refusing to send the tokens.
Find a P2P platform providing an intermediation service is the best way to avoid most of these pitfalls. Thus, the cryptocurrencies are held by the platform during the transaction and will be returned to the buyer as soon as the seller confirms receipt of payment. Both parties will thus be protected. In case of disagreement, a representative of the platform will intervene.
Loss or destruction of private keys
Cryptocurrencies are based on an encryption system using transaction authentication keys.
A public key accessible to all and a private key kept secret reserved for identification and authentication. It is automatically generated when subscribing to a wallet and makes the user the owner of the funds therein.
The loss of a private key causes the loss of control and access to all crypto-currencies in the wallet. Almost 20% of losses Bitcoins are due to the loss or destruction of private keys. It is therefore crucial that you regularly back up your private keys, preferably on a secure and isolated computer. Additionally, never store your private key online, especially if it is not in an encrypted format.
Unregulated trading platforms / exchanges
The popularity of cryptocurrencies has caused the number of transactions and trading platforms to explode. As a result, choosing a good one has become more difficult. The platforms offer the same level of services as traditional financial institutions.
However, in lack of control, scams and market manipulation have multiplied. In addition, some platforms take exorbitant fees or have fraudulent practices (difficulty or even impossibility of withdrawing funds).
Finally, beware of platforms with a low level of security, they are a benchmark for all types of fraudsters.
The best practice when finding a platform is to look at user reviews and take the time to read the fine print of the terms of service. Also watch out for those that offer great promises.
Regulation may be a drag on the growth of cryptocurrencies. Many governments around the world have enacted regulations to limit or even ban the use of cryptocurrencies in their countries.
They see cryptocurrencies as a way to bypass financial regulations and facilitate money laundering.
Others are working to integrate cryptocurrencies into their national currencies. Others finally like El Salvador, have fully adopted cryptocurrencies or even have launched or are considering launching a national cryptocurrency.
Yet the risk of legislation restricting the use of cryptocurrency is very real.
Exchange rate risks
Crypto prices fluctuate frequently. This makes it a high risk investment.
For example, Bitcoin rose from $ 20 in December 000 to over $ 2020 in April 65, before dropping to around $ 28 in June 000.
You would have made a significant profit if you had bought Bitcoin in January and sold it at the end of April. But if you had kept it a few more days, you would have lost a lot of dollars.
Thus most crypto-currencies are volatile, their value fluctuates compared to traditional currencies. Additionally, since cryptocurrencies are speculative, investors are at the mercy of value at the time of sale.
Fiscally, cryptocurrencies considered as investments. This means that they are subject to the same tax regime as shares, in particular capital gains tax.
In addition, any cryptocurrency obtained through mining is taxable. Thus, cryptocurrency investors are required to report their earnings as income.
However, some cryptocurrency transactions are not taxable. The purchase of crypto-currencies, their storage and their transfer between platforms or wallets are exempt from taxes. Cryptocurrency laws can be complex. However, you can familiarize yourself by reading the IRS guidelines on virtual currency.
Investing in cryptocurrency is risky and you need to be prepared for any eventuality. The world of crypto-currencies remains decentralized and poorly regulated, which attracts many crooks and criminals.
Therefore, those who are just starting out must invest amounts that they would be ready to lose entirely.