Cryptocurrency investment risks: what you need to know
The world of cryptocurrency has exploded in recent years and attracted millions of investors worldwide. With the potential for high returns and diversification in new markets, it is no wonder that many people jump on the crypto train. As with any investment, however, there is risks. In this article we deal with the most important investment risks associated with cryptocurrency investments and provide you with a comprehensive understanding of how these potential pitfalls can navigate.
1. Market volatility
Historically, cryptocurrency markets were known for their extreme volatility. The prices can skyrocket in a few days or drop overnight, so that investors keep worthless assets. This is due to the decentralized nature of cryptocurrencies, which means that there are no central authorities that control prices. The value of cryptocurrencies is largely determined by market demand and speculation.
Example: In 2017, Bitcoin’s price rose from around $ 1,000 to over 19,000 US dollars in just a few weeks. Similarly, Ethereum’s price rose from around $ 100 to over $ 4,500 in 2020.
2. Lack of regulation
Cryptocurrency markets are largely not regulated, which can make it difficult for investors to protect themselves and their assets. There is currently no central authority that monitors cryptocurrency transactions or regulates the industry.
Example: The lack of regulation has led to numerous cases of fraud, phishing attacks and other illegal activities on the cryptom market.
3. Security risks
Cryptocurrency exchanges, wallets and other online platforms are susceptible to hacking and security violations. This can lead to the theft of your private keys, which is a critical component of every cryptocurrency investment.
Example: In 2016, several top-class hacks led to considerable losses for cryptocurrency investors, including the notorious Mt. Gox-Hacks, the over 850 million Bitcoin steel.
4. Market Manipulation
The cryptocurrency market was plagued by market manipulations and pump-and-dump schemes. This can lead to artificially inflated prices and later breakdowns if the market becomes aware of the manipulated price.
Example: In 2018 it was found that several large cryptocurrency exchanges were involved in pump-and-dump schemes that had artificially inflated the price of certain cryptocurrencies.
5. Lack of dividend payments
Many cryptocurrencies do not generate dividends or interest in their participations. This means that investors may miss passive income and potentially significant returns over time.
Example: Bitcoin does not pay his owners; Instead, it uses its mining output to secure the network and validate transactions.
6. Regulatory uncertainty
Regulatory uncertainty can lead to considerable risks for cryptocurrency investors. The governments still find out how they can regulate cryptocurrencies, which can lead to the confusion and uncertainty of investors.
Example: The US Securities and Exchange Commission (SEC) has taken a tough attitude towards cryptocurrency investment options and warned investors not to invest in undisclosed or unproven projects.
7. Technical risks
Cryptocurrency technology can be complex and unpredictable. This means that even experienced investors encounter difficulties when trying to navigate on the market.
Example: The Bitcoin fork from 2018 was an important example of how technical risks can affect cryptocurrency markets, which leads to a widespread price volatility.
How to reduce investment risks
While there are inherent risks related to cryptocurrency investments, you can take steps to alleviate them:
1.