What Are The Risks of Buying Crypto?
By Danial Daychopan on ALTCOIN MAGAZINE
Evaluation
Digital coins have been associated with multiple misconceptions spread by conflicting media stories, similarly, there are risks untouched by the news that deserves more focus.
Almost daily, we hear about the benefits of crypto and how it will “make the world a better place”. However, people who join the ecosystem find very few resources about the risks involved and how to protect themselves against them. The purpose of this article is to educate new friends of crypto, and anyone else interested, to learn more. Crypto OGs, look away now!
This article covers some of the highly discussed dangers tied to digital currencies and solutions on how to prevent or limit them.
Financial Risks
Risk: Volatility & Longevity
The short-term volatility of the market is potentially the most obvious risk of purchasing crypto. Bitcoin has experienced numerous drops over the years, however, it has also recovered equally as frequently, proving its resilience in declining markets.
In 2011, Bitcoin crashed as much as 94% from its previous all-time high of $32 down to just $2. Individuals who treat cryptocurrencies as a “get rich quick” scheme and panic sell their assets at the first sign of a red candle are highly likely to lose value off their newly established crypto portfolio.
Market manipulation is another concern for those wary of the sector. Unfortunately, there are still some elements of the “wild west of crypto”, which continue to loom over the industry in the form of ‘pump and dump’ schemes, fake trading volumes and the Herbalife style ICOs.
An additional consideration should be the longevity of the sector. While hodling may be the smarter move for those who lack trading knowledge, there is no certainty over the long-term future of many alternative coins in the market. Furthermore, alternative coins appear to be coupled with Bitcoin at a fundamental level, and dependant upon it for liquidity.
Like any new business, more than “90% of altcoins are expected to fail”. As a large portion of these derive their value from a white paper rather than a startup with a functioning product, their prices are mostly speculative.
The success of a start-up token should be measured by its use-cases and the benefits it provides, not the price on exchanges. Many are merely gimmicks with little or no use-case, their future, doomed.
While more than 4,000 ICO projects have managed to raise a combined total of roughly $12Bn, over half fail within 4 months of their token sales.
Only a handful of startups have gone from white paper to a working product with a business model after their funding round.
Solution: Risk Management
Risk management is the number one solution to avoiding the damaging impacts of the rollercoaster crypto market. By personally learning about the market, developing a trading strategy and using stop losses, investors can minimise risk.
Do not speculate on ICO’s, only support the token if it provides a use case that brings value to you or the ecosystem in general.
Regulatory Risks
Risk: New Laws & Regulation
The interaction between cryptocurrencies and regulation is a bit of a paradox. On the one hand, regulation may be a necessity for mass adoption. On the other, regulation could attack the fundamental values of cryptocurrencies themselves, namely existing beyond the purview of any central authority.
As an emerging market, the legal status of cryptocurrencies is yet to be fully determined, and any new developments can have monumental impacts on the sector.
One striking example is the extreme form of regulation seen in China’s ban on crypto-fiat exchanges and ICO’s, as well as the speculation of a potential ban on Bitcoin mining. When you consider the nation at one point accounted for three quarters of the world’s bitcoin mining operations and over 95% of bitcoins trading volume, the magnitude of such regulatory changes becomes clear. However, rest assured, like in any industry, the space left by the demise of a mining giant will be replaced by another.
Solution: Utilise Other Locations
Cryptocurrencies are borderless by design and although one country may be able to dictate what occurs in their confined region, they have no control over its use beyond that. It is the equivalent of trying to eliminate the internet. When China banned its cryptocurrency exchanges, trading moved elsewhere with South Korea and Japan proceeding as the next dominant trading hubs.
Although some western countries have expressed their negative perceptions of cryptocurrencies, less economically developed countries have welcomed digital currencies with open arms as it offers true value to their economies. Cryptocurrencies can never be completely shut down as a result of regulation and the countries that embrace them are more likely to reap its benefits.
Cyber Security Risks
Risk: Hacks & Manipulation
Thefts, hacks and breaches have totalled over $882 million for the cryptocurrency market in 2018 alone. These malicious activities largely affect cryptocurrency exchanges as a result of their lax security.
A detailed report from a ratings website found 54% of all cryptocurrency exchanges to have poor security in at least one area, which leaves them and their users vulnerable to attacks.
Dubious cryptocurrency operations have plagued the industry and have also nearly tripled in a year as public interest rises. Although this is the case, internet criminality, in general, has also skyrocketed in recent years with almost 46,000 filed cases in 2017.
Solution: Take Protective Measures
Do your own research, background check exchanges, and educate yourself on the common hustles floating around crypto communities.
People have learned to identify suspicious activity in the traditional world; the exact same logic applies to the crypto world with one notable difference. There is a lack of access to knowledge in this newly emerging environment which makes people even more susceptible.
The best practice is to always use a decentralised exchange, or move your assets onto a cold wallet storage after trading.
Always make sure that you have the private key to your cryptocurrency address, otherwise you will always have to rely on a 3rd party to release them to you. As the adage goes, “not your keys, not your coins!”
Human Risks
Risk: Lack of Consumer Protection
Cryptocurrency passwords (so-called private keys, or pass phrases) are a lot more forgettable than “What is your mother’s maiden name?” and there have been plenty of stories surrounding lost cryptocurrencies. In fact, a digital forensics firm that studies bitcoin blockchain believes 3.79 million bitcoins to be lost forever based on a high estimate, and 2.78 million based on a low one.
There will always be the potential for human error. While the inalterability and immutability of blockchain technology is designed to protect users against central and 3rd party control, this can prove troublesome.
For example, if you lose your digital currencies, they are lost forever. But if you know how to secure them, then you can become your own bank.
Solution: N/A
By taking the necessary precautions, one can avoid the need for consumer protection. By learning how to use cryptocurrencies correctly and proceeding with caution, you can reduce the chances of making a critical error.
There is a growing part of the industry that regulates itself. However, we still need the local and international watchdogs to come together to weed out the bad actors, so we can protect the consumer and let the industry thrive.
Are The Risks Worth It?
The biggest risk associated with cryptocurrencies is a lack of understanding. Those who have suffered from malicious cyber-attacks could have taken more measures to reduce the chances of a security breach. The harsh reality is that frequently discussed dangers associated with cryptocurrencies tend to be down to the user and not the technology.
Skewed media attention often draws away from the solutions at hand. There is a growing scene of innovative cryptocurrency projects emerging, which are tackling the many issues experienced by both newcomers and existing crypto-enthusiasts.
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The purpose of ALTCOIN MAGAZINE is to educate the world on crypto and to bring it to the hands and the minds of the masses. This article was written and composed by Danial Daychopan on ALTCOIN MAGAZINE.
