Like most things in life, there are risks attached to investing in cryptocurrency – or if you prefer, the buying and hodling of cryptocurrency (crypto slang for holding). There is no way of getting around it. The best we can do is to try and mitigate the risks.
Likewise, there are rewards for investing in cryptocurrency that by far outstrip the rewards that are available by investing in traditional, fiat currency dominated non-crypto, non-blockchain projects – or simply by holding fiat currency. As an example, despite the devastating onslaught of the crypto bear that started in 2018, those who bought Bitcoin (BTC) at the beginning of the 2017 crypto bull market are still laughing all the way to the bank. This is not even to speak of those who supported Bitcoin from the very beginning like Roger Ver and others.
That being said, the primary purpose of this piece is not to shed light on the potential rewards or to claim that investing in cryptocurrencies is bad, that the sky is falling, that crypto is dead or anything along those lines. It is simply to consider some of the risks of investing in cryptocurrency. You have the option to make it part of your due diligence strategy, keep it in the back of your mind or outright reject it. You are free to do with it as you please.
The top risks of investing in cryptocurrency
Here are some of the biggest or top risks of investing in cryptocurrency:
1. Amplified Losses
One of the biggest risks of investing in cryptocurrency is the risk of amplifying potential losses. This is the risk of getting involved for all the wrong reasons, especially when greed is allowed to have the upper hand.
For example, if you choose to invest in crypto purely based on FOMO (fear of missing out) and HYPE (unjustified, extravagant claims), you unnecessarily amplify the risk of the potential losses you can suffer.
In such instance, it is not only the risk of a financial loss or the risk of losing money that is amplified. There is a real risk, after suffering a substantial financial loss, that you may choose not to continue to participate in the greatest revolution of recorded history. This risk is real, especially if a lack of knowledge and an overdose of greed, leaves you oblivious or blind to the revolutionary change that cryptocurrencies can potentially bring about.
When the latter happens, the risk of going around bad mouthing crypto is also amplified. If we are honest with ourselves, we have to admit that most of use will rather choose the easy way out than to admit being too lazy to do our own due diligence. It also amplifies the risk of losing friends and family, especially when we got them into cryptos for all the wrong reasons.
Another example. It may be extremely tempting, especially during a crypto bull market, to max out our credit cards, get second or even third mortgages in order to buy or invest more in cryptocurrencies. We might reckon that the market will continue to go up, that we will be able to pay off our debts and make out like bandits in no time.
Now there is no doubt that the above strategy or a revised version of it has helped many people to pay off their debts and indeed enabled them to make out like bandits. Make no mistake though, the very same strategy has devastated others, leaving them with nothing or very little to make ends meet – destroying relationships, livelihoods and more in the process.
Thus, while potential losses are certainly a risk factor to keep in mind, amplified losses that could have been avoided from the get-go are something else altogether. Why risk the whole nine yards by amplifying the risk of losses?
2. Reliance on technology and mass crypto adoption
Volumes and volumes can be written about this, but it doesn’t take a rocket scientist to figure out that cryptocurrencies are heavily dependent on technology and mass crypto adoption to be successful. This makes the functioning and value of cryptocurrencies heavily dependent on the underlying technology and that people actually trust the technology enough to use it on a mass scale.
The crypto market is largely unregulated. This has its benefits, but also leaves the door wider open to fraud. This is by no means to say that regulated markets are not affected by fraud. Bitcoin was after all created as an answer to the mass fraud and corruption allowed in the centralized, regulated markets.
It is only to say that when there is no too little regulation of the right kind, scammers and fraudsters normally use it as an excuse to defraud and steal from people. The crypto ICO craze of 2017 has proven this beyond a reasonable doubt. This is why we can expect to see an increase in the number of Security Token Offerings (STOs) moving forward. The extent to which STOs will help to reduce risks of investing in cryptocurrency stand to be seen. History has shown that too much centralization is a huge risk factor in itself.
4. Price volatility
Another risk factor to keep in mind is the risk of price volatility This risk is very real and can go to extremes within a very short period of time. The crypto market is known for being a volatile beast earmarked by extreme price volatility.
What is meant with extreme price volatility here? To place it in perspective, when the price of a stock drops with 5% on Wall Street and jumps back 5% or more on the same day it is considered to be an extremely volatile stock. When this happens with a crypto token, it is nothing to write home about. E.g. movements in the qash price as can be seen on this website is pretty normal for the crypto market. In fact, the most well-known of them all, Bitcoin declined with more than 50% since a high of almost $20,000 in 2017 – a sure sign of the kind of volatility that will make heads spin elsewhere.
This makes proper risk management, planning and budgeting essential, especially when you need funds over the short-term to meet obligations outside of the crypto market. The last thing you want is to be forced to cash out when the market is down or when crypto prices are lower.