There is a lot of hype going on with cryptocurrency nowadays. This is a kind of currency that doesn’t have a physical representation. It only exists in the digital world. Investors see it as a great investment opportunity since the value of a digital coin like bitcoin fluctuates over time. For instance, the value of bitcoin rose from USD 32 in 2011 to USD 19000 in 2017. It is important to know the risks of investing in cryptocurrency before you shell out a lot of money for it.
- The legal status of cryptocurrency is not yet fully established
The legality of cryptocurrencies varies in different countries. The chair of the US Securities and Exchange Commission, Jay Clayton strongly warned that investors need to be cautious about criminal activity in the sector.
Regulators advise investors to be wary if they are promised returns that are too good to be true. Since there isn’t any fully established regulation and risk assessment mechanism, you are not guaranteed of any ROI. In addition, it is not covered by the Federal Deposit Insurance Corporation which provides insurance to bank deposits of up to USD 250,000.
- Cryptocurrency can become worthless
Even Bitcoin acknowledges this fact in their FAQ page. The recent fluctuations in the prices of cryptocurrencies may entice gullible investors into rushing into an investment that they don’t thoroughly understand. The investor interest can possibly plummet depending on the state of the world economies.
- Higher risk of phishing and spoofing payment details
Imagine transferring money to your colleague. You correctly copied his wallet address but malware changes the address in the clipboard with another value. Not all users are vigilant and review the wallet address after copying it. This is a tedious task especially if the address is a long string of characters.
Phishing can also occur wherein users upload their personal details in a fake website. You need to have a strong computer security system to protect your investment from theft. You might have to enlist the services of a third party.
- The encryption in cryptocurrency is not enough to secure your money
Your digital coins are encrypted to make them secure. Unfortunately, the coding doesn’t identify the owner, only the currency itself. Once you have the encryption code, you can become the owner of the coins.
The coin’s coding can’t determine if you are the specific owner. The anonymity feature means that the coin is completely gone once it is already stolen. You only have a minimal chance of getting it back.
- Hard fork splits may occur
The value and support for a certain cryptocurrency entirely depends on the community that utilizes it. If a disagreement between stakeholders arises, the network may be split in order to support other cryptocurrencies. This is known as “hard fork.”
- There will still be fees involved
One of the reasons why bitcoin was created is to offer an alternative to banks that ask for high fees. Unfortunately, trading cryptocurrencies will still involve fees. The amount is usually a small percentage of the total amount of the transaction.
Buying and selling bitcoin can be done through an application in your smartphone. The fees being charged will depend on the number of people worldwide who are purchasing and selling the currency. The fee gets higher as the number of people trading it increases.
Know the Risks before You Take a Leap into Cryptocurrency Investing
People nowadays are desperate for something that can give them instant fortune without risks. While it is true that many have indeed gained from their investments in cryptocurrencies, you don’t want to invest in something that you don’t understand. Keep in mind that cryptocurrencies are risky investments that are carried out through new and unproven technology. If you really want to get into the market, don’t shell out money that you can’t afford to lose.