The need to explain the risks of investing in cryptocurrency and the technology that support them is expanding as interest in them skyrockets. Around the world, regulators, tax agencies, and central banks are attempting to comprehend the nature and significance of digital currencies. While buying and selling virtual currencies carries some legal risk, individual investors can still make a lot of money through investing in crypto.
The novelty of cryptocurrencies in comparison to more established currencies and payment methods is largely to blame for the uncertainties surrounding them.
What is Cryptocurrency Investment?
Cryptocurrency investment is simply when a crypto trader buys a particular digital currency when the value is low and hopes to make a profit as the value of that crypto increases over time.
Digital currencies protected by blockchain technology are known as cryptocurrencies. Buying bitcoins outright or investing in cryptocurrency funds and businesses are examples of investing in cryptocurrencies. Through cryptocurrency exchanges or certain broker-dealers, one can buy cryptocurrencies.
Is Trading Cryptocurrency Profitable?
Yes, Crypto trading is profitable. Trading with cryptocurrencies is a breeze. That’s a given, I believe. That’s why a lot of individuals profit greatly from it! Trading is intended to take advantage of short-term opportunities, whereas investing is a long-term endeavour based on a buy-and-hold approach. The cryptocurrency market is erratic. As a result, asset prices are subject to sudden, sharp increases and decreases. You need the appropriate analytical and technical skills to be a successful trader. To effectively forecast price increases and decreases, you must examine market charts on the performance of the listed assets.
If the price of the asset rises or falls, you can trade by taking a long or short position. In other words, it doesn’t matter if the cryptocurrency market is bullish or bearish—you can still profit from it. Additionally, you must realise that in order to trade, you must locate a reliable exchange that is easy to use so you may profit from the best opportunities.
8 Threats of Cryptocurrency Investment
Although there is the potential for stunning gains as well as catastrophic losses, investors should be aware of the wide-ranging risks associated with cryptocurrencies. Here, we discuss the risks of investing in cryptocurrency associated with technology, regulation, and cryptocurrency volatility that could reduce the value of an investment.
1. Price Volatility
Prices for cryptocurrencies can vary greatly from week to week or even day to day. For instance, the price of Bitcoin dropped by 30% on May 19, 2021, as a result of Chinese government restrictions on Bitcoin mining and trade.
Additionally, there are other factors that can affect the price of cryptocurrencies, including B. Changing public opinion, global news, mainstream adoption, protocol improvements, impending legislation, hacks, scams, etc. Additionally, because cryptocurrencies are a relatively new asset class, price discovery is still an ongoing process in the market.
2. Technology Risks
To ensure that transactions are legitimate, cryptocurrency blockchain technology uses a variety of security features, including decentralisation, encryption, and consensus procedures. But no blockchain is fully safe from all dangers.
You may avoid errors like computer failure, theft of your device, or unintentional uninstallation of your digital crypto wallet by periodically backing up your crypto wallet. Threats including software flaws, data corruption, and 51% attacks—where a small number of bitcoin miners seize control of more than half of the network’s computer power—are increasingly challenging to defend against.
The development of quantum computing, the following generation of computing technology, is a concern for cryptocurrency investors and creators. Malicious people can fabricate transactions, hack bitcoin wallets, or rewrite portions of the blockchain to alter transaction records because of the blockchain’s potential processing capacity. The value of cryptocurrencies will plummet and maybe vanish when that occurs. Although it will certainly be years before that time, post-quantum cryptography is already being developed by Ethereum and other crypto groups.
3. Low Liquidity
The ease and speed with which an asset can be turned into cash are referred to as liquidity. Particularly smaller and more recent cryptocurrencies have a tendency to be less liquid than other investments like stocks and bonds. This means that even while the marketplaces for cryptocurrencies operate practically continuously around the world, trading and redeeming digital currency may not proceed as expected.
Because of this, there could be “slippage,” which is the discrepancy between the predicted price and the price at the time the trade is made. Slippage can happen while waiting for a trade to execute when the bid-ask spreads or the gap between what the buyer is willing to pay and what the seller is willing to take fluctuates, sometimes more than once. When the real price is less than anticipated, purchasing power grows. An example of this is a “positive slip.” When the actual price is more than anticipated, purchasing power is reduced. The term “negative slippage” refers to this.
Slippage frequently occurs when trading cryptocurrencies and its average value is between 0.05% and 0.1%. It can be up to 1%, especially for volatile cryptocurrencies. Check to see if your cryptocurrency trading platform supports limit orders, slippage estimates, and slippage notifications in order to prevent or reduce negative slippage.
4. Scam and Fraud
Scammers and fraudsters are using both elaborate and subtle ruses to take advantage of the public’s growing desire for cryptocurrency.
You may be familiar with QuadrigaCX, for instance, which collapsed in 2019 following allegations of fraud against its founder and his unexplained passing. Buyers lost CAD$169 million as a result. Or perhaps you read news articles like Squid Game, the 2021 “rug pull” fraud that defrauded people out of US$3.3 million by selling a coin using the name of the popular Netflix series but bearing no relation to it.
Surprisingly frequently, simple cryptographic methods are used. Based on cash losses in 2021, investment fraud in Canada will be the most commonly reported fraud, totaling at least C$163.9 million, with the majority of claims coming from cryptocurrencies after reading deceptive adverts. According to the Canadian Anti-Fraud Centre, it is about those who invest in other types of cryptocurrency fraud, such as pump-and-dump schemes (where con artists trick investors into buying cryptocurrencies, then sell their holdings to depreciate them, take the invested money away, etc.).
Even from reputable sources, exercise caution when considering bitcoin “investment opportunities” for your own safety. Social media accounts are frequently hacked by scammers in an effort to get victims to send money to their pals. Find out more about this and other prevalent cryptocurrency frauds, as well as how to file a complaint. Additionally, keep a lookout for airdrops and initial coin offerings (ICOs) (free token distribution). These occasions are perfect for scammers.
5. Crypto Hacks
To steal hundreds of millions of dollars worth of coins, hackers have targeted cryptocurrency trading platforms, blockchains, and investors.
The high-profile hack is in the news on a global scale. A hacker took more than $600 million from Ronin Network, a blockchain project with a gaming focus, in April 2022. In December 2021, hackers obtained the private keys from one of his hot wallets, stealing $200 million from cryptocurrency exchange BitMart. The use of advanced hacking methods like SIM swapping, cryptojacking, and cryptoclipping affects retail investors as well.
6. Legal and Regulatory Uncertainty
Decentralised by nature, cryptographic blockchains have benefits and drawbacks for investors. The absence of middlemen speeds up transactions and reduces prices, but it also means that neither banking institutions nor governmental bodies support cryptocurrencies. It also implies that, in contrast to government regulation and investor protection for other kinds of investments, investors have no redress if things go wrong.
Globally, governments are getting closer to regulating cryptocurrencies. President Joe Biden of the United States signed a long-awaited executive order mandating federal agencies to look into digital currencies in-depth in March 2022. In the end, Biden’s directive might not result in the crypto business facing the crackdown that many anticipated, but rather more transparency and stability. Other nations have adopted various strategies for dealing with cryptocurrencies, ranging from outright bans to making them legal tender.
The legal framework for cryptocurrencies in Canada is also changing. Virtual currencies are governed by securities regulations and are viewed as commodities by the Canada Revenue Agency (CRA). Activities involving cryptocurrency are taxed. Details are provided below.
7. Human Mistakes
Shocking tales of bitcoin owners forgetting or losing their private keys frequently make news headlines.
Other costly crypto errors include transferring the incorrect coin, sending it to the incorrect address or blockchain, and making “fat fingers” mistakes when consumers type the wrong price or purchase the incorrect commodity. For instance, an investor unintentionally sold his Bored Ape NFT in December 2021 for 0.75 ETH (about $3,000). He then admitted to losing attention to a CNET reporter.
Additionally, cryptocurrency businesses commit errors, paying exorbitant fees, transferring incorrect currency, and unintentionally flooding the market with millions of dollars worth of currency. With Tether, a stablecoin linked to the USD, the latter scenario happened in 2019. The excess tokens were destroyed by the corporation, but the flaw alarmed investors and reduced the value of other cryptocurrencies, including Bitcoin. This is one of the many risks of investing in cryptocurrency.
8. Income Taxes
Many don’t know that depending on the type of bitcoin activity, income is either taxed as capital gains or as business income. Investors consequently pay state taxes, penalties, and interest. Without realising it, you can trade, utilise, or transfer virtual currency for a long time.
Additionally, there are tax repercussions associated with cryptocurrency mining, staking, and trading non-fungible tokens (NFTs).
How to Protect Yourself from the Risks of Cryptocurrency Investment
Obviously, dangerous assets are not limited to cryptocurrency. Before making any investment, investors should conduct extensive research. But because of the buzz surrounding them, cryptocurrencies are susceptible to FOMO. Take your time and be aware of the dangers.
Although investing in cryptocurrencies is inherently risky, it is still feasible to invest wisely and reduce unnecessary risk. Should you choose to invest:
- Do some research on each coin that interests you. Find answers to inquiries like, Why was it created? What does it serve? What is the capitalization of the market? Is the volume of purchases and sales normal or excessive? Can you stake the crypto?
- When selecting a site for buying and selling cryptocurrencies, exercise due diligence. Consider asking: Is it regulated? What safeguards does it have? How much do the buying and selling costs total? Does it offer customer service?
- Find out how to safely store seed words, public keys, and private keys. You can swap hot and cold wallets and gain access to cryptocurrency using a seed phrase, which is also referred to as a recovery phrase or mnemonic phrase.
- Always be on the lookout for scammers. These are more complex and can be challenging to locate. Be wary of extravagant advertising campaigns like airdrops and initial coin offerings.
Despite these safety measures, it is preferable to keep the amount of cryptocurrency and other digital assets in your core-and-explore investment portfolio to a minimal percentage. Keep your investments within your risk tolerance.