Less than two years ago, investing in cryptocurrencies was quite simple because there were a limited number of cryptocurrencies and ICOs. However, 2017 saw the proliferation of the number of ICOs and cryptocurrency startups launched. This presents a problem to investors who now have to use due diligence to determine the best cryptocurrency assets to invest in with the lowest risk.
Risks in the cryptocurrency industry
As a person who wants to invest in the cryptocurrency industry, some inherent risks are synonymous with the industry. They include:
i. High volatility
Volatility in the cryptocurrency industry is a double-edged sword. It provides attractive spreads when the market is bullish, but it also increases the losses when the market is bearish. A look at Bitcoin’s fluctuation gives a good example of the two sides. Prices rose from $4,000 to around $20,000 at the highest value before dropping down to $6,000 again at the start of 2018. Right now, the prices are back up to around $10,000. This volatility means that investors need to analyze the market before making a purchase.
ii. The high number of ICOs
ICOs are the cryptocurrency market’s main approach to crowdfunding. Firms pitch to investors who purchase tokens or coins before launch while the firms use the money raised to develop the platform. The investors simply trust that the startup will deliver the final product and that the firm’s coins or tokens will increase in value after launch. This has become a popular fundraising alternative leading to around $4 billion raised in 2017. Some like the DAO raised $150 million in minutes.
Unlike the traditional IPO, the investors do not get any equity, and the startups are under no obligation to deliver on their promises. This has led to the influx of ICOs that never got off the ground or that never delivered on their promises. Approximately 90 percent of ICOs flopped last year. From this number, a significant portion of them are scams seeking to hoodwink unsuspecting investors.
iii. Failing cryptocurrencies
As of the beginning of 2018, there are approximately 1400 cryptocurrency coins and tokens. However, studies indicate that 46 percent of them are scams or they will fade away due to a lack of technical soundness and poor business inadequacies. Many of them do not even engage their communities anymore, and the value of the tokens is on a downward spiral.
These risks make investing in the cryptocurrencies market more challenging than what most investors think. You need to be able to differentiate between the good cryptocurrencies or ICOs with cryptocurrency assets that are scams or those that are destined to fail. Additionally, you need to be able to read the market to ascertain whether your cryptocurrency of choice is at a high or a low. Even though Bitcoin is a stable cryptocurrency, buying it when it is at its peak of bullish performance will only lead to losses.
Evidently, investing in the cryptocurrency market carries a lot of risks. Yes, the rewards may be handsome, but the losses can also be heartbreaking. The best way to navigate the industry is by doing proper due diligence. If you have the necessary business acumen and technical insight into blockchain technology, you will be able to navigate the cryptocurrency market’s treacherous waters. However, there is another option if you do not possess these skills. You can simply get expert research from Global Spy to avoid making novice cryptocurrency investment mistakes.
