Common risks involved in Cryptocurrency
If you don’t know the risks when dealing with cryptocurrencies, you’re not fit to dive into the field.
After understanding what the crypto space is all about, you need to know about the risks. It prevents you from losing all your hard-earned money.
Since crypto is an emerging space, the risks are on the high side. It is not to scare you but to make you aware of the dangers ahead.
Before we get into the risks, check out this post to learn what cryptocurrencies are.
There are several cryptocurrency risks, and we are going to take a look at some of them.
User Risks
Cryptocurrency wallets
Since users are directly involved with their funds, they should do more to keep them safe.
A crypto wallet houses your cryptocurrencies. This is similar to how your bank account keeps your fiat currencies.
When you create a crypto wallet, you are given private and public keys.
A public key contains an address that you use to receive cryptocurrency. Yes, it is the same thing as a bank account number.
Private keys contain keys that you can use to authorize transactions. It is also there to prove ownership of your wallet.
Do not share it with anyone. If you do, your funds are in danger.
Also, you need to know that losing your private keys will lose access to your wallet and funds.
Your private keys can be in different formats depending on the wallet provider.
The format commonly used is a mnemonic code.
When you create your wallet, the providers will encourage you to write down this mnemonic code as a backup.
Some tips on how you can store your private keys
- Engrave them on metal. Paper and wood are bad ideas because a fire could destroy them.
- Don’t store it on any device that connects to the internet. They are prone to hacks.
- Do not store it on your flash drive. They could get corrupted
- Do not give anyone access to your keys
People also tend to make mistakes when it comes to public keys. Public keys are used to send and receive crypto. You might know them as wallet addresses.
When you want to send cryptocurrency to a wallet address, it is advisable to double-check.
If you plan on sending massive funds, kindly send a little first to crosscheck if you sent it to the right address. After you have confirmed it to be the right wallet, you can send the remaining funds.
Hackers
There are a lot of scammers and hackers in the crypto space. This is why you should question everything when it comes to crypto.
Remember, if your cryptocurrency gets stolen, there’s no one you can report it to.
You have to keep your cryptocurrency safe from hackers.
It is hard but not impossible for an attacker (or group of attackers) to hack a blockchain. For an attacker to do this, he would need to gain more than 50% of the blockchain computational power. That is why it is called a 51% attack.
For blockchains with thousands of nodes (e.g., Bitcoin and Ethereum), an attack becomes harder to carry out. An attack like this would cost $10 billion in equipment, with little guarantee of success.
Since hacking of blockchain seems more like a waste of money and resources, hackers target vulnerabilities in the users.
These vulnerabilities might be in your devices, emails, wallets, etc. Let’s take a look at ways you can protect yourself from hackers.
- Before you choose a wallet, always do your research.
- Have a separate device for transactions
- Do your due diligence before investing. Most projects are scams
- Don’t sign your wallets unnecessary onto a website
- Use a trustworthy VPN
- Install a firewall
- Beware of fake emails and websites
- Always confirm from the source that’s how you differentiate real from fake
- If it is too good to be true, then you are right.
Service providers risks
Centralization risks
Although cryptocurrencies are decentralized, some have business entities behind them.
The aim of creating a cryptocurrency is to give power to the holders of those currencies.
In some cases, this is different because some business entities hold the governance rights to that cryptocurrency.
Since these businesses hold the rights, they can make crucial decisions without consulting the holders. These decisions might hurt currency holders in the long run.
This explains why experts advise investors to stay away from somewhat centralized cryptocurrencies.
Smart contract risks
On Ethereum’s blockchain, developers can build applications on top of it. It is made possible by a technology called a smart contract.
Smart contracts are programs built using code that executes when conditions meet.
Smart contracts can be used to build anything, including crypto wallets. Since smart contracts are written in codes, they can be verified and audited by anyone on the internet.
Hackers might want to exploit any vulnerabilities found.
Other risks
Although some of the things included in this list are not directly risky, they can still impact your funds negatively.
Volatility
The cryptocurrency market is still an up-and-coming market. The technology behind it is still new. This can make the prices of crypto tokens go bizarre.
Many people are in this market because cryptocurrencies can make you rich quickly. That is not false, but it can also drain your funds more quickly.
The market is full of people who can control the prices and gain from them. Be careful out there; the crypto market has more potential to break you.
Always do your research before purchasing any crypto.
Legal risks and taxes
Some countries are finding it hard to make cryptocurrencies legal. Cryptocurrencies can facilitate tax evasion and money laundering. They can do this in an untraceable way because the blockchain is anonymous.
Some countries have banned the use of cryptocurrencies.
Because of some of the risks listed above, it can’t be legalized.
Conclusion
Cryptocurrency is a new and promising technology. It is setting itself down as the stepping stone to many technologies arriving.
The risks above were not to scare you away. Remember, prevention is better than cure.
If you want to enter the crypto market, I would advise you to dig deep into ways to protect yourself.
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