08 Apr 2021 Morgan Hayze
How to Avoid These Risks When Investing in Cryptocurrency
Cryptocurrencies and blockchain are cutting-edge technologies that continue to draw the attention of stakeholders looking for alternative forms of investment. From the banking and finance industries to tourism, healthcare, academe, government, and more, these digital assets continue to revolutionize the ways people transact and exchange information.
Bitcoin remains to be the market leader among all cryptocurrencies that use blockchain technology as a way of sending and distributing data into cyberspace and across computer networks. And as Bitcoin mining—the process of using specialized computers to solve “blocks” of mathematical equations to create new Bitcoins—continues to gain traction, more will be keen to look into how to make the most of this digital asset.
However, the question remains, are cryptocurrencies worth the investment? While digital currencies provide an exciting opportunity to delve into an entirely new class of assets, investing in this dynamic and emerging technological asset is not without its share of risks. Here are some things you need to know so you can assess whether adding digital currencies into your portfolio will work best for you.
Highly Volatile Market
The value of digital tokens changes constantly and dramatically. The traded price can fluctuate significantly in a short time, and if the value goes down, it can still either go further down or rise again. An investment that may be worth thousands of U.S. dollars today may be worth only hundreds tomorrow.
The Bitcoin market, for example, is very volatile. In 2017, Bitcoin’s value swung between $900 and $20,000. In January 2021, the average price of bitcoin briefly reached an estimated $40,000.
No Regulation or Legislative Protection
Unlike most traditional currencies and established investment assets, cryptocurrencies are not backed by a government or central bank. The decentralized nature of cryptocurrencies shows that their tax status and trading rules can change overnight.
Cryptocurrency doesn’t have any official safeguards or insurances, either. This means that if you store your crypto online through digital wallets provided by a company, but the company becomes insolvent or gets hacked, you can lose everything you’ve held as no third party can step in and help get your money back.
Cryptocurrency is Not a Guarantee that You’ll Make Money
Unlike growth mutual funds, there’s no pattern to the rise and fall of a cryptocurrency’s value, and one can’t predict the changes or calculate returns. Cryptocurrencies are not foolproof investments. Plus, it may not be easy to find credible sellers with a proven track record. Those who promise higher returns or profits that are too good to be true are highly likely to be scammers.
Risks of Fraud and Manipulation
The prevalence of cryptojacking and other cyberattacks on crypto exchanges have put the spotlight on how these digital currencies are vulnerable to security threats and breaches. Malicious hackers and criminals have found ways to infect computers with malware to steal cryptocurrencies or use them to make shady deals on the black market.
These attacks have caused massive losses for investors who have had their digital currencies stolen. Since blockchain transactions are mostly anonymous, it isn't easy to go after cybercriminals.
How to Minimize Risks when Investing in Cryptocurrency
As with other kinds of investments, risks are also innate with cryptocurrency. This also means that there are ways to reduce the effects of those risks on your money.
- Do Your Research
Stay updated with the latest news and trends. Invest time in doing your due diligence and research before signing up for any exchange. Start by making small investments and aim for long-term benefits. You should never invest more than you could afford to lose.
- Diversify Your Portfolio
Don’t go all in and invest in a single coin or cryptocurrency. Try to invest in several digital currencies as much as possible to hedge against sudden price falls in a volatile market. Build a solid strategy to diversify your risks by investing in a pool of cryptocurrencies vetted by financial professionals.
- Be Wary of Scammers
Don’t be swayed by exaggerated claims and investments that promise high returns from obscure crypto assets. Carefully examine the claims that the company or token seller is making so you won’t get victimized by Ponzi schemes or exit scams.
Check if the cryptocurrency exchange is reliable, has resilient security measures, an array of crypto assets, and strong levels of liquidity. Seek help from legitimate financial professionals whom you can trust to have your best interests in mind.
Cash In the Crypto Trend
As cryptocurrencies continue to evolve, it will also be increasingly difficult to determine which coins and tokens are worth investing in. Digital currencies are still promising investment opportunities, but it will all depend on your tolerance for risks, familiarity with the market, and objectives. Keep these tips in mind before taking the plunge so you can avoid the pitfalls and protect your initial investment against fluctuations and fraudulent activities.
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