Cryptocurrencies: Risks Of Investing And Need For Transparency
Cryptocurrencies have been in the news for numerous reasons for many months. Whether it is for the unprecedented rise in price (and subsequent mini-crashes) or for the changing legal regulations, discussions on virtual currencies have become commonplace. Cryptocurrencies attract investment from individuals as well as large corporates and funding companies. Backed by, as well as contributing to the growth of, blockchain technology, cryptocurrencies have changed the investment game completely.
However, investing in cryptocurrencies is not without its concerns. This article aims to shed light on the risks associated with cryptocurrencies, and touches upon what changes can be made to alleviate them.
Risks Of And Concerns About Investing In Cryptocurrencies
This is one of the largest concerns related to cryptocurrencies. In the last six months of 2017, Bitcoin went from $2,000 to $19,000, only to come down to $7,500 in June 2018. While this might have been one of the most volatile cryptocurrency fluctuations, it is indicative of the changes possible in the prices of virtual currencies. Any investment, depending on when it is made, can result in massive losses or gains. However, this volatility is highly unpredictable, leading to increased cautiousness and wariness when it comes to investing in cryptocurrencies.
The regulations on cryptocurrency are still open to debate and change. Some nations are recognising them as securities and bringing them under laws that affect all such investments. On the other hand, some nations are banning ICOs and cryptocurrency trading altogether. The novelty of cryptocurrencies leaves them susceptible to constant and unprecedented changes in legal regulation, at least until they obtain greater mass acceptance. As a result, cryptocurrency investments carry inherent risks directly related to any sudden change in regulations.
Bitcoin investors need to pay a premium to trade the cryptocurrency on the stock market, only being able to do so under the Bitcoin Investment Trust (GBTC). Trading in other cryptocurrencies needs to be done through companies like Coinbase, which also charge fees. Opting to trade via companies that charge reduced costs can result in larger risks and complexities. Consequently, investors tend to have to pay high costs when investing in cryptocurrencies, whether in the form of fees, premium charges, or increased risk.
New coins are being introduced into the market almost daily. However, their longevity is a matter of concern. Will any given coin have a long, uninterrupted life? Or will they lose all value over time? This risk is true of any cryptocurrency. Older virtual currencies like Bitcoin, Ethereum, and Ripple depict greater promise of longevity. However, investing in any coin, old or new, carries the inherent risk of the coin simply not surviving in the long term, and investments within it being rendered value-less.
Psychological factors have a large effect on cryptocurrency investments. With high volatility and constant change in prices and regulations, people who tend to be risk-averse may choose to cut their losses and sell their investment. This might be true even at a time where holding on could be the solution to riding out a slump until prices change to make investments profitable again. Hence, an investor needs to take into consideration his own stress management ability, risk outlook, and funds’ liquidity and availability, all of which are factors that can greatly influence the risk in cryptocurrency investment.
The cryptocurrency sector is constantly expanding with new cryptocurrencies being introduced almost every day. While this increases options for investors, it also opens the market up to low-quality coins that have no longevity and could make for bad investments. Furthermore, the increased activity could attract greater interest from governing bodies, leading to more regulations. Hence, the cryptocurrency market being in constant motion can add to the risk of investing within it.
Cryptocurrency prices are primarily determined by supply and demand. While this can be a good form of self-regulation, it also increases the adverse effect caused by panic and rumours. The smallest pieces of bad news can increase stress on the sector, causing prices to greatly vary and setting off abrupt investor reactions that further existing negative effects.
Lack of mass-adoption
Although cryptocurrencies have gained popularity in the last year and a half, they still remain a mystery to many people. One of the largest causes of this is that cryptocurrencies aren’t easy to understand. Furthermore, constant change in regulations and public mindset make the sector dynamic and add to this lack of understanding. This has resulted in a lack of mass adoption, which increases longevity and quality concerns, as well as makes new investors wary. Adoption of cryptocurrencies on a larger scale will lead to a greater sense of security, primarily driven by improved public opinion and more appropriate regulations. However, until such time that this adoption occurs, the lack of clear understanding and regulations will add to the element of risk.
The Need Of The Hour
Cryptocurrencies drive the funding of a large number of startups, especially in the blockchain space, which is poised to revolutionise multiple sectors. However, the above-mentioned risks and concerns can cause numerous problems including lack of successful funding, bad investments, and slower than anticipated growth of blockchain and related technology.
Cryptocurrencies have become an integral part of startup investment. As a result, reducing risk within the sector can have massive benefits to investors, startups, and the growth of technology.
The need of the hour is improved predictability in price movements, and improved ability to analyse cryptocurrencies and hence identify the right investment option. Achieving this can reduce numerous risks, especially that caused by price volatility. Effort needs to be increased to ensure that some element of predictability and analysis is brought into the cryptocurrency sector.