Cryptocurrency refers to a digital currency that is secured by cryptography. This is based on a network that exists outside the control of the government and central authorities. Cryptocurrencies are usually criticized for multiple reasons. These currencies are also used for illegal activities such as exchange rate volatility etc. Due to such circumstances, it is risky to invest in these currencies. You may also be subject to investing emotions.
However, there are some positive aspects, as well. Cryptocurrencies are famous for their portability, inflation resistance, and divisibility. It is crucial to consider the risks before you start trading.
5 Risks Associated with Investing in Cryptocurrencies
So now, let’s have a look over the high risks involved in investing in cryptocurrencies.
1. Lack of Regulations
You should consider certain things before investing in cryptocurrencies. Sometimes there is a lack of a regulatory framework, which can lead to price volatility and manipulation. There is also a possibility of future restrictions that can significantly impact the value of cryptocurrencies. Crypto regulations are disorganized. Therefore, there are certain uncertainties involved in investing in cryptocurrencies due to the lack of proper rules.
2. Exiting the Market
There are certain conditions that investors oversee before entering the world of cryptocurrencies. One of these conditions is the exiting term. Sometimes exchanges allow you to only withdraw in specific currencies like USD, EUR, or GBP.
Also, there are certain limits below which you cannot withdraw your amount. Sometimes withdrawal process takes more than a month, and you need to wait for the withdrawal to go through specific verification processes. You might face many issues like differences in the exchange rates and fees involved. You must also bear in mind that there are high risks of manipulation and scams in investing in cryptocurrencies.
3. Security Threats
You should know about the security threats involved before investing in cryptocurrencies. Hacking is a significant threat that you should consider. Many hackers try to steal from your wallet, and you cannot do anything about it.
Also, you cannot recover anything that is stolen from your wallet. Mistaken transactions cannot be reverted. Moreover, you do not have insurance rights in such cases.So, it is better to be experienced before you take a step further in cryptocurrencies.
4. Price Volatility and Manipulation
Cryptocurrencies involve a high risk of the unpredictability of the market situation. There are cases where people lost money even after predicting that they are going to win money. People have witnessed unpredicted losses and gains in the cryptocurrency market. Volatility in the cryptocurrency market is mainly due to three primary sources: speculation, sentiment, and market manipulation. Influential investors can manipulate market prices, and it might empty your pocket. There are different types of manipulation strategies that are used. These include dark pool trading, shilling, and wash trading.
5. Loss/Destruction of the Private Key
Your digital wallet is controlled by anyone who has access to your private key and public key. If you lose your private key, you will be unable to gain access to your digital wallet, leading to money loss. Also, if your private key is somehow in possession of any third party, you might get scammed and lose all your money.
So, these were the significant risks involved in the investment in cryptocurrencies. Therefore, you must see and fully understand the risks that are linked before you start trading. Cryptocurrency trading may not be the right choice for every investor, and it is highly recommended to take professional and experienced investor advice before you make a start.
The benefit of already having an experience is that you would have plenty of knowledge about the financial markets and your investments’ security. This would save you from any mishap or bad experience.