Want to invest in cryptocurrencies? Know these 5 risks
Cryptocurrencies have been extremely rewarding for some initial adopters that decided to invest early. For example, in February 2017 a bitcoin was worth, roughly, € 1,000. Only ten months later, in December, a bitcoin was worth more than € 16,000. If you had invested in bitcoin back in February last year, you would have made tons of money.
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.
