Blockchain and cryptocurrency are the most renowned terms used in these days that are used for replacing the existing transaction management of present day scenario.
Cryptocurrency has many advantages when compared to the transaction in banking channels such as reduce in transaction fee, avoiding double spending and reducing hacking risks.
Although there are many benefits regarding the cryptocurrencies, one should beware of some risks that can change the whole profit scenario and make the user face some serious consequences.
Risks in Investing in Cryptocurrency
Before planning to invest in cryptocurrency, one should have a clear ideology of the model and how it can merge in one’s own business model. It is not a great money making tool that can give a heap of money all of a sudden and those one should beware of the risks involved in investing in the cryptocurrency, some of the risks are
1. Risks in Regulation
At the present day, the crypto world has several cryptocurrencies and many emerging tokens ready to take place in the market that causes a stir as well as confusion in the minds of the users. The regulators in the crypto market ban many currencies based on its influences and effects of it in the market.
A cryptocurrency can totally be banned overnight in news overnight by the regulators. This may not be a great issue to the market, but the whole loss is retained only to the investors who have invested lots of time and money in making and publishing it.
2. Drop in value
The value of any cryptocurrency is determined by the routine of the daily transaction management in the market. There may be an instant drop in a cryptocurrency or it may become worthless overnight.
This value migration can affect the investor from the core and can cause a huge loss as well as drop in the further investments. Value drop risks cannot be controlled by any individual and totally depends on the market marginal routine.
3. Scams in ICO
Emerging of Initial coin offering has led the way of several scams in the crypto world. Introduction of a lot of new cryptocurrencies has become quite frequent and the scammers may directly affect investors by direct trading or exchanging their ICO tokens with the persisted tokens that are already available in the market.
The ICO that are in the market but has no backup are surely frightening to invest in.
4. Risk of Survival
For a novice, the first and foremost matter of fear is that nobody can guarantee the survival of any cryptocurrency in the market sustaining all the competitions pre-existing in the market.
The investors as well as the owner require intellectual mindset as well as follow the whitepaper strategy to make the currency survive in the market for a long time. A genuine cryptocurrency having a legal backup and good quality product sustaining in it can be assured of being in the competition for a long time.
5. Risk in Exchanging
After creating a cryptocurrency with a specific trademark and logo, one could proceed for the exchange in the market. Having faith in the ICOs leading in the table is not always good.
The faith may give a quite opposite and most adverse effect as the fall of any cryptocurrencies cannot be guaranteed in the present day scenario. Even the most popular cryptocurrency can become worthless overnight and thus the whole graph of the present week is to be analyzed before the exchange.
The value drop of the persisted cryptocurrency that is chosen to be exchanged can cause severe loss to the investors as well as the owner of the ICO.
6. Lack of Good Quality Assets
For the survival of a cryptocurrency in the crypto world, one must have a product that is only valid to buy with the own cryptocurrency.
Having a good quality product that has been already renowned in the market can assure the survival of cryptocurrency as it can be bought only by a certain cryptocurrency.
As long as the product is in the market, the value of cryptocurrency tends to stay stable or rise with the updates in the daily up and downs of the market.
A novice trying to survive in the competition of the crypto world should have a legal backup as well as the whole tax documents up to date.
If any loophole is found by the investigators then it can affect the cryptocurrency in the value as well as the whole existing phenomenon. Thus when it comes to the capital income and gains, one should have a clear idea on the whole taxation criteria.
8. Crypto Mining Risks
There are a lot of miners included in every Blockchain network those who validate the block created by a new ISO and after all the validation and approval they add the transaction to the main Blockchain.
If the miners are new and are not aware of the work of mining, then there will be a direct risk to every associate of the Blockchain. It may also get prone to hack by a new associate. Hacking is not so simple in Blockchain but he will have all the data regarding the transactions happening within that block in the form of public distributed ledger.
This risk occurs as every associate has a copy of the public ledger that contains all the transactions that are happening in that Blockchain network.
9. Decentralization Risks
Cryptocurrencies are totally decentralized projects where no third parties such as financial institutions, government or any other intermediate are involved between the individual transactions.
This is good in some aspects such there is no way of leakage of data regarding any transaction but the only risk is that it is not backed up by the government and thus it is not secure as that of a bank account. Moreover, one cannot ask or argue with anyone if any data is lost or one cannot get access to the account.
The base of these cryptocurrencies are the strong encryption methods, but if a person loses the password regarding the public and private key then the account becomes inaccessible to anyone.
10. Crypto Buzz Risks
Each and every cryptocurrency needs to create hype in the market initially as no investors would invest in that if it not known to many people. Many scammers also try to create hype for money from the investors before the exchange.
If an investor invests in such type of currencies then it would be proved too risky and can bring a massive loss in their business as well as in the investment. An investor should invest only after a thorough analysis of the currency as well as the whole white paper model of the business to lower the risk of getting lost in it.
11. Security Risks
As there are no third parties involved in this strategic decentralized transaction management, an investor has no assurance of getting profit or loss.
The loss may occur during the time of exchange or even in the launching process where no one can guarantee the survival of the crypto in the market where there is a number of persisted cryptocurrencies like Bitcoin which are giving their best to make their survival in the crypto world.
Moreover, the user who is associated with a Blockchain has no backup to enter into own account to do a transaction or check the public distributed ledger. If the public and the private key is lost then there will be no security or assurance to get back the money invested in the cryptocurrencies.
12. Risks of Liquidity
Liquidity refers to the phenomenon where a person is not able to sell the investment at a reasonable price. This is the main reason that the cryptocurrencies go through high volatility practically. The increase in volatility and illiquidity also increases the risk of manipulation of price.
A highly experienced person can divert the market to his side by offering a huge order in the market before all the investors those who are looking forward to investing.
These are the major risks that any investor can face in their investments in cryptocurrencies irrespective of the status of buzz created by it in the market. Moreover, a cryptocurrency can vanish overnight before our eyes due to these reasons by the regulators or high-end valuators of the crypto world.
The main reason for people investing in cryptocurrency or using it for transaction management is that it provides low transaction fees and is less prone to hacks.
In the other point of view, having the decentralized system totally vanishes the assurance and security of the investment as there will be no assurance for any sudden manipulation of the money or security breach by high experienced hackers.
In a few cases, the benefits of the cryptocurrency that makes it far better than the transaction in a normal banking channel become the major drawback of it too.
Having a decentralized system and no assurance for the money invested in it except the copy of public distributed ledger is surely a drawback that one should analyze well before investing in it.