While cryptocurrency investments may sound exciting and fun, they’re not bereft of their share of risks. Since they are completely operated online, they are prone to a variety of cyber attacks in addition to being volatile. Therefore, before you decide to invest in cryptocurrencies, you must be aware of the risks. Some of them have been listed below.
Issues with the Private Key
All cryptocurrencies are stored in digital wallets that are controlled by the one who possesses the public and private key. Both these keys are related to the digital wallet that contain the cryptocurrency. If you lose the private key or anything else happens to it that compromises its integrity, you won’t be able to access your cryptocurrency. In other words, you’ll lose your digital wallet. If someone else gets control of your wallet, they will probably access all your cryptocurrency and use them up.
All kinds of trading platforms as well as service providers are prone to malicious attacks online in the form of hacking. For instance, close to 120,000 units of cryptocurrency that amounted to almost US $72 million got stolen from Bitinfex in Hong Kong in August 2016. As a result, prices dropped to 23 percent. A similar attack was carried out in September 2015 when BitPay lost about $1.8 million worth of bitcoins.
If the Bitcoin Network is controlled sufficiently by a malicious actor, he may alter the Blockchain. Even though it’s decentralised, Bitcoin Network is increasingly being concentrated due to mining pools, consequently making them riskier than before.
Risky Peer-to-Peer Transactions
You can always trade digital currencies online on a number of platforms. It can be a third-party service or a peer-to-peer transaction. In some places, the counterparties don’t provide any intermediary service or clearing or even regulation. This causes the risks to remain higher when it comes to direct transaction between parties.
Other risks involving exchanges and trading platforms
Cryptocurrency trading platforms are mostly unregulated and have very little transparency in terms of operations. As a result, the cryptocurrency trading has often been prone to frauds and other security breaches. Investors have in fact suffered losses with no hope of compensation. The most recent of such frauds happened last week with a particular cryptocurrency called Squid. When people began investing in it initially, the price was one penny for a token.
Eventually, it garnered more attention via multiple media outlets. The price came to a staggering $38 for a token and was being referred to as Pancakeswap. Then, the cryptocurrency decided to take its investors for a ride. According to CoinMarketCap, the value of the token rose from $628.33 to $2,856.65 in a matter of 10 minutes. And then, like a bubble being blown to eventually pop, the value of the cryptocurrency came down crashing to $0.0007.
Lack of confidence while investing
Even though they are evolving rapidly as part of the digital assets industry, cryptocurrency is highly uncertain. Many of them are not backed by the central bank of their respective countries or even other national and international organisations. Their value is very volatile as it’s determined by market participants and their transactions. As a result, when investors display less confidence, the trading activities will collapse and there will be an abrupt drop in its value.
Regulations that prevent or restrict digital currencies trading
When it comes to the legal status of cryptocurrency, various regulators have expressed significant inconsistencies. Additionally, regulators think that cryptocurrencies are often used by criminals and terror outfits for their untoward actions. This has prompted many countries to completely restrict the right to possess and/ or sell cryptocurrency.
Risks associated with conversion of the currency
Investors may encounter problems in converting the currency due to interruptions related to depositing and withdrawing fiat currency in and out of trading platforms. For instance, in China, two of the biggest trading platforms terminated the margin lending and withdrawals. As opposed to that, they started implementing stricter policies regarding anti-money laundering. This action of the Chinese authorities has led to decreasing prices and trading volumes.
Taxation of Cryptocurrencies
Everyone who wishes to invest in cryptocurrencies must keep in mind that there is no certainty when it comes to tax treatment of the investments in cryptocurrency. In some jurisdictions, cryptocurrencies are considered to be assets while they are looked upon as assets in other cases. The purchase and sale of cryptocurrency can be subject to different taxes such as sales tax or value-added tax. Other investors may need tax advice regularly so that there is appropriate tax treatment of investments in cryptocurrency.
“Fork” in the Blockchain causing competition
There are certain protocols governing cryptocurrency and its peer-to-peer interaction comprising the different users. If users don’t agree to the protocols that are to be employed, it causes a fork or the opening up of two different networks. For instance, Ethereum experienced a situation like this in its Blockchain in 2016. As a result, there are now two different versions of Ethereum – Ethereum and Ethereum Classic. They are very different in terms of trading. Even Bitcoin underwent a similar situation and now has a different variant referred to as Bitcoin Cash.