It is quite obvious that cryptocurrencies are promising, however they’re still in an experimental phase. Bitcoin (the first ever cryptocurrency) was launched in 2009. Since then, over 4,000 other cryptocurrencies have been created. Some of the most well known alternatives are litecoin and ethereum.

However, to the date I wrote this article, a bitcoin was worth slightly more than € 6,000. For people who invested in bitcoin around December 2017, this was terrible news. It seems that interest in cryptocurrencies has been falling during the first half of this year and that the market value has followed suit.

Among the three top cryptocurrencies (bitcoin, litecoin and ethereum) bitcoin is the only one that still remains a global trend. Nevertheless, ethereum still gathers interest in certain pats of Asia and Eastern Europe. Litecoin, however, doesn’t really appear anywhere.

So, if you want to invest in cryptocurrencies, you should bear in mind these 5 risks.

Volatility

As previously stated, the value of bitcoin has increased dramatically in 2017 but suffered a steep decrease at the beginning of 2018. In general, most cryptocurrencies experience huge volatility. Several financial authorities in Europe have put out statements saying that investors must be prepared for the possibility of loosing most or even the totality of the invested capital in cryptocurrencies.

Protection

Cryptocurrencies are digital assets designed to function as a medium of exchange. However, these assets, as well as the respective negotiation platforms are not regulated nor supervised by official authorities. When investing in cryptocurrencies it is also extremely important to bear in mind that the companies behind trading platforms are most probably based in a different country. Therefore, the resolution of eventual problems one might have is outside the jurisdiction of national authorities.

Information

Most people are unaware of how cryptocurrencies values are defined. Thus, there is the risk of consumers not being offered a fair price. Furthermore, information available on cryptocurrencies is often inexact, incomplete or unclear. Therefore, when investing in these assets consumers are often unaware of all the risks their investment is exposed to.

Risk of Fraud

Cryptocurrencies are frequently associated to fraud. Several national financial authorities in Europe, and overseas, emphasise that cryptocurrencies are recurrently linked to illegal activities. Moreover, authorities highlight the high potential for fraud and market manipulation. In fact, third parties might be able to explore small “mistakes” within the protocol’s code of cryptocurrencies.

Inadequate for most ends + not able to inherit them

It is very hard to predict the future of cryptocurrencies. There is no consensus among experts. This accrues from the asset’s volatility and lack of regulatory framework, of course. At the end of the day, cryptocurrencies are inadequate for most consumers, including short-term investors as well as those with long term financial goals (such as retirement savings). Furthermore, given all of the above, cryptocurrencies cannot be, or are very hard to inherit. Potential heirs might be completely unaware of fortunes that are left hovering in the internet forever – complete value destruction.

Cryptocurrencies must still overcome many hurdles and problems. Scalability, criminal activities, price manipulations, tax and legislation just to name a few aspects. We could compare this situation to the early stages of the internet (and we all know what happened there). In fact, cryptocurrencies are still in their infancy. For sure, there is risk and reward.

Some experts actually argue that interest has only dropped in the short term and that crypto and blockchain technology remain forces to be reckoned with. In fact, several experts claim that the behavior exhibited by bitcoin over the last few months is in line with previous variations of its value and that we could expect, in the short term, a steep increase of value.

I hope this article has helped in clarifying what you should look out for before investing in cryptocurrencies. Many have delved into the world of cryptocurrency investment over the last months/years without knowing what was lying ahead. In my opinion, if you are considering investing in cryptocurrencies you must be clearly aware of the risks I stated above. It is quite obvious that the rewards might be huge, but be careful.

Nevertheless, if you are comfortable with all these risks and believe that the experts are right, you could go ahead and try investing in cryptocurrencies. In my opinion, the easiest and quickest platform to do so is Coinbase. Good luck.

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Cryptocurrency is a secure and sometimes even anonymous currency that relies upon blockchain technology, essentially a ledger that everyone can see.  This ledger lists all the transactions that are happening in the cryptocurrency system.  But it is not a physical, paper ledger.  Instead it is run through computer code on thousands of networked computers around the world.  Together, these computers are confirming who owns what amount of a cryptocurrency, for example Bitcoin.

The code is designed to release new currency, ie Bitcoins, on a schedule.  To get them, a cryptographic puzzle must be solved.  ‘Mining’ of the currency takes place by computers trying repeatedly to solve the puzzle until they succeed.  The computer that ‘wins’ then publishes its solution to all the other computers on the network and receives the coin.  Anyone can become a ‘miner’ by downloading the software.

It starts to become clear that all of these computers and servers engaged in cryptocurrency mining use energy that will increase CO2 emissions.  The energy used to power the computer network behind these currencies should not be underestimated.  It’s a significant amount, right at a time when we are trying to wean ourselves away from fossil fuels. We know we are years or maybe decades behind in tackling our global challenge of climate change and that we must evaluate every new development upon its likely impact on the environment.  Ironically, given that cryptocurrency is seen as the ultra-modern, liberating financial trend, it could be failing our environmental agenda.

The Digiconomist Index tells us that one Bitcoin transaction is equivalent to powering nine US homes for a day and miners are constantly installing faster computers in their pursuit of the currency.  This index also tells us that the number of British people who could be powered by Bitcoin mining is a staggering 6.1 million (more than the population of Birmingham, Leeds, Sheffield, Manchester, Bradford, Liverpool, Bristol, Croydon, Coventry, Leicester & Nottingham combined).

At cryptocurrency’s current growth rate, the demand would soon outstrip the electricity available, requiring new energy-generating plants, just at a time when we are trying to be climate conscious.  The trajectory of this new strain on the electricity grid is not sustainable.

What can we do about it? There are some technological efforts underway to minimise the volume of energy required to mine Bitcoin.  In addition, some early movers are trying to build in green credentials from the start.  They include GENERcoin, a cryptocoin which can be redeemed for a specific solid biofuel, or traded like Bitcoins. The EnergyCoin is more of a local or community currency. Producers can earn SolarCoins, a Bitcoin with a twist, by presenting their solar renewable-energy certificates.  But these new initiatives have not received that much attention.  Other examples include Climatecoin, an Ethereum-based cryptocurrency, which teamed up with a carbon credit exchange in an effort to help in the fight against climate change. They aim to create the world’s first blockchain-based platform for carbon credits trading.  CarbonCoin literally plants trees and they explain that they use low energy methods, claiming that their mining takes lightbulb levels of energy, rather than the equivalent of entire countries.  BitSeeds is collaborating with the Rainforest Foundation to help stop deforestation and plant 1 billion trees through the creation and use of its cryptocurrency.

We all need to educate ourselves so that it is widely understood that cryptocurrencies demand energy that is more often than not met through fossil fuel energy sources.  In addition to polluting our air and water, they are contributing to greenhouse gases that cause the climate change we so urgently need to counter.  Bitcoin and other cryptocurrencies have been marketed to us as creating some kind of utopia where we no longer have to deal with banks and we can rely on the block-chain community to ensure our payments are valid.  That is all very well but not when the Bitcoin system itself is based upon environmental damage.  Serious policies and innovation need to be directed to ensuring that environmentally responsible currencies are the norm and not a novelty.

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