Everyone’s talking about adding cryptocurrencies to their investment portfolio nowadays. It’s hard to see why not, given how well these assets have been performing in the market recently. While the potential rewards you reap may be high, these investments also come with a commensurate level of risk. From the risks of investing in Bitcoin to any other type of cryptocurrency, it’s important to know what you’re getting into.
If you’re considering taking the plunge, don’t just FOMO in blindly. Here are some of the concerns you should take note of, before deciding if these investments fits with your risk appetite.
While researching the risks involved in investing in Bitcoin, you’ve likely come across these words. Bitcoin, as well as other cryptocurrencies, are notorious for their price volatility. This volatility is due to the various macroeconomic factors surrounding the scene, including events that occur in traditional markets. To complicate things, the crypto-space moves at the speed of light, with numerous events and launches happening every day. If this volatility is something that you are not willing to stomach, then perhaps it might be a better idea to stick to other asset classes.
A mind-blowing amount of money flows through the cryptocurrency space every day. This is accompanied by crazy booms and busts that have shocked and amazed many observers over the years. These movements are partially due to the activities of whales (i.e., wealthy investors) in the market who have accumulated a significant amount of assets. Because of this, any action they take with these assets will be sufficiently large enough to generate waves, either shocking the market into driving up prices or setting off a sell-off. All of these will impact the value of the assets you choose to buy. If you don’t know how to play the game, there is a chance you might incur huge losses in the process. As the kids say nowadays, you might ‘get rekt.’
Another risk of investing in Bitcoin, or any cryptocurrency for that matter, is the potential regulatory issues that may arise. Because of how new this particular asset class is, governments are still struggling to formulate their stances against it. While some nations such as Singapore and Switzerland have proven to be particularly amenable to these new assets, others have not been as friendly. With very little warning, some countries may choose to impose bans on cryptocurrencies, potentially leaving you with no way to get your assets off an exchange.
Scams in the crypto space are a dime a dozen. It isn’t common to see scammers posting on social media groups or even sending direct messages to try and defraud naïve individuals of their money. These ill-intentioned entities tend to prey on investors who are new to the scene, are not sure how things work, or individuals who are greedy and hope to see speedy returns on their investments. Remember – if it seems too good to be true, it probably is.
Unreliable Projects and Investments
While the beauty of the crypto-space is that anyone can start a project should they wish to, this also leaves the door open for an influx of unreliable projects and investments in the space. If you don’t research the project and its team before investing, it may leave you with nothing but a bag full of worthless coins.
Cybersecurity Breaches and Hacks
Another cryptocurrency investment risk comes in the form of hacks, where malicious individuals manage to attack accounts on centralized and especially decentralized exchanges. This should hardly come as a surprise, given how reliant on technology cryptocurrency assets are. Exchanges have been hacked on multiple occasions in the past, leading to significant losses of money. To make matters worse, receiving compensation for your lost money is entirely up to the exchange and how it chooses to resolve the issue.
Private Keys & Cold Wallets
Private keys are decryption keys that grant you access to your wallet. Hacking a wallet without knowing the private key is impossible, so your funds will remain safe and secure. But the primary risk of private keys is human error and the loss of private keys – if you ever lose your private keys, you’ll have no way to access your wallet and your funds.
Cold wallets are devices that are entirely disconnected from the internet and used to store the keys to your wallet. Cold wallets are seen as a way to help secure your funds, and the chances of cyber attacks are close to none. The only risk involved with Cold wallets is the risk of human error and people losing the device. If this happens, you can again say goodbye to your funds.
As already mentioned in the point above, human error is a commonly occurring risk in the crypto space. We make mistakes all the time – we’re human, after all. However, mistakes in the cryptocurrency world can be costly. This is an often-overlooked risk in Bitcoin investment that is worth mentioning. In addition to losing private keys and cold storage devices, one of the most common human errors is entering the wrong wallet address and sending coins to a wrong or incompatible wallet. This error will lead to the permanent loss of these sent funds.
While these are some of the risks you may encounter, there are plenty more uncharted waters to navigate. Just remember – keep your head cool, stick to your plan, and always do your own research. If you are willing to put in the work and be patient, these investments may very well pay off.