Risks of Investing in Cryptocurrency

Cryptocurrencies are infamous for their relatively high volatility, making them extremely risky for both new and seasoned investors. Despite being a relatively accessible investment vehicle, navigating the cryptocurrency market presents various unique challenges that are difficult for investors of all experience levels.

Early-Stage Technology

Cryptocurrencies like bitcoin have only been around for slightly more than a decade. Additionally, many of the several thousands of Ethereum-based tokens have only been in existence since the late 2010s.

Many consider the technology underpinning cryptocurrencies—that is, blockchain—as still being in its experimental phase. Like any other emerging technology, you should acknowledge the very real possibility that blockchain technology never achieves mainstream adoption.

Despite some of the technology being somewhat experimental, this also unlocks a tremendous amount of opportunity that simply isn’t available in more mature and seemingly stable markets.

Custody

Many cryptocurrency investors make expensive mistakes with storage and custody. Cryptocurrencies give you the ability to ‘be your own bank’ and whilst this means more control for users, it also means greater exposure to risks involving loss or theft. If you happen to make a significant error when buying, selling, transacting or storing and lose access to your cryptocurrency, in almost all cases there is nothing you can do to get it back. Unlike storing your money with a bank, there are no insurance mechanisms protecting against loss or theft of funds.

As self-custody can involve a level of knowledge and understanding about security and process that many are unwilling to undertake, many cryptocurrency investors and traders don’t opt for the self-custody route. Instead, they opt for storing their cryptocurrency with a custodian—such as an exchange or dedicated custodian service. If the custodian suffers a hack or gets ordered to shut down, there is a risk of permanently losing all your cryptocurrency unless the custodian is sufficiently insured against such situations.

One of the central ideas behind the creation of bitcoin and cryptocurrencies is to unlock the possibility for people to store and transact their own money without the need for third-party intervention (such as banks or payment gateways like PayPal). But storing your cryptocurrency might not be for you, and that’s okay! As the cryptocurrency space evolves there are more ways for you to store your cryptocurrency, with many businesses out there providing services to store your cryptocurrency for you – these businesses are also known as custodians, and we cover them further in the course. Rest assured, if ‘being your own bank’ worries you, there are a growing number of options available to you.

Both self-custody and custodian methods of cryptocurrency storage involve their own risks and it’s important to research and understand the risks of both before embarking on your cryptocurrency journey.

Primitive User Interface & Experience

Due to the young age and primitive nature of the cryptocurrency space, user experience is often considered suboptimal for users engaging with wallets, exchanges, purchasing, selling and transferring. There are plenty of opportunities for user error, potentially leading to loss or theft of funds with typically no protection mechanisms in place to safeguard users from this occurring.

This places a lot of responsibility on users to be knowledgeable, safe and cautious when engaging with cryptocurrencies to avoid loss or theft of funds.

This is in stark contrast to the traditional financial system, where banks and fintech companies offer far more user-friendly solutions with security mechanisms built-in to minimise or insure against these sorts of issues.

Regulations

Cryptocurrencies are still relatively new, with lawmakers still working out how to regulate them. Regulators have the power to limit the cryptocurrencies that local exchanges can list and the general functionality of cryptocurrencies. For example, privacy-oriented cryptocurrencies such as Monero are facing increased threats from regulators, who can effectively stop exchanges from listing them—due to their ability to hide transaction information.

Regulators also have the power to define them as assets or property—instead of currencies—which influences the tax definitions applied to cryptocurrencies. The attitude of regulators is often subject to the country and jurisdiction you reside in.

Investors in cryptocurrency are highly subjected to the risk of regulators influencing market sentiment and cryptocurrency prices at any time through the imposition of laws that seek to ban or restrict cryptocurrency promotion, purchasing, selling or possession.

Relatively High Scam Activity

Due to the relatively unregulated nature, primitive user experience and low barrier to entry of interacting with cryptocurrencies, there is a prevalence of scams within the cryptocurrency space, including (but not limited to):

• Advance Fee Scams: Typically scammers requesting a user to transfer funds with the promise of sending back more funds in return under the guise of a promotion (e.g. “Send 0.5 BTC to this address and we’ll send you 1 BTC back”)
• Ponzi Schemes: Typically the commencement of a cryptocurrency project or coin by unknown bad actors with no intent to service a working product, but instead to raise funds (often through the use of multi-level marketing tactics) with the intent of abandoning the project once sufficient funds are raised.
• Phishing & Coercion: Typically involving predatory activity by bad actors trying to obtain the private keys or sensitive information of novice users either by coercion, deception or hacking.

Luckily there is a lot you can do and actions to minimise the risks of scams. This where our security modules come in, we have simple best practices and modules dedicated to helping you manage and minimise these risks so that you’re not driving blind.

High Volatility

Cryptocurrencies are extremely volatile relative to traditional markets. It’s common to see a cryptocurrency’s price strongly increase or decrease over a short period. You can be caught off-guard if you aren’t prepared for erratic price action. This could lead you to make emotional decisions such as chasing your losses, which can rapidly worsen your situation.

This course is designed to give you more information about cryptocurrency, investing and trading so you can best navigate the volatile crypto-markets and be prepared. And it all starts with having a plan of action.