The crypto market is one of the fastest-growing markets in the world. With the innovation through blockchain, the underlying technology behind cryptocurrencies, various products have been launched. The DeFi and NFT markets are just two of the products that have gained popularity and are supported by investors in the industry. In recent data by Coinmarketcap, the industry has now a current market cap of $2.1T. But cryptocurrencies have always been the subject of discrimination primarily due to various risks associated with them. Regulations were implemented by most countries around the world to protect investors from the financial risks of crypto investments.
Authorities have issued strong warnings to investors against risks involving crypto investments. But what are the different risks all investors should watch out for? To avoid these risks, educating ourselves is a must. Let’s examine the major risk in crypto investments.
Major Crypto Investment Risk
Cryptocurrencies are basically volatile. Prices may change in a short period of time. The crazy price swings of the most dominant cryptocurrency BTC (bitcoin) on some occasions have led to a market crash. And since most cryptocurrencies have BTC (bitcoin) pairing, the price drop is inevitable.
BTC (bitcoin) price is now at $46,463 and lost almost half of its value from its previous all-time high at $64,859 in data by Crypto.co. Prices of major altcoins have also followed suit. The effect of the consecutive price crash due to a nosedive on the price of the crypto asset has even spanned to traditional markets.
The massive adoption of cryptocurrencies hopes to bring sustainability to the prices of these digital assets.
Elon Musk has been accused of manipulating the prices of cryptocurrencies because of his tweets. His tweets were known to influence the prices of BTC (bitcoin), his favorite crypto DOGE (dogecoin), and another dog-meme token, the BABYDOGE (Baby Doge Coin).
The price manipulation adds up to the volatility of cryptocurrencies. Other entities that have the capability to manipulate prices are trading platforms, crypto media outlets, and other influential personalities in the crypto market like Elon Musk. Manipulation is being carried out using wash trading, dark pool trading, pump and dumps, and shilling.
Lack of Regulations
Despite efforts made by regulatory bodies worldwide, the lack of proper regulations can stagnate the adoption of cryptocurrencies. This creates a high percentage of uncertainty exposing investors’ crypto assets to more price volatility and manipulation.
In countries like the United States, Singapore, and South Korea, crypto exchanges are considered legal. Japan and Australia both consider crypto exchanges and cryptocurrencies as legal. But in China, neither crypto exchanges and cryptocurrencies are considered legal. Efforts are now being made to draft a proper regulation that will be best for cryptocurrencies.
Security breach remains a major concern in the crypto world. Hacking continues to plague crypto exchanges that serve as custodians for their customers. The Coincheck $534 Million hacking in 2018 was tagged as “the biggest theft in the history of the world” according to NEM Foundation president Lon Wong.
Crypto exchanges have launched sophisticated security systems to protect their consumers. But despite these advancements, hackers continue to exploit the flaws in these security systems. As a countermeasure, trading platforms are now using hardware wallets to store their customers’ digital assets.
Scams also abound the crypto market. Shady crypto exchanges and fake ICO’s (initial coin offering) are just two of the schemes that bad actors are using to defraud investors. In a report by Investopedia, $9M is lost every day due to cryptocurrency scams. The top five biggest crypto scams include OneCoin, Bitconnect, PlusToken, Bitcoin Savings & Trust, Pincoin and iFan, and the most recent the Mirror Trading International.
But despite these risks, a large number of investors who have invested in cryptocurrencies continue to grow. The adoption by institutional investors has also added to investor’s confidence in virtual currencies. But the risk associated with digital assets continues to persist and needs to be addressed. The presence of solutions will help to further the growing adoption. Also, the possibility for countries to recognize cryptocurrencies as legal tender will soon turn to reality. El Salvador was the first country to adopt Bitcoin as legal tender. Argentina could be next and soon the whole world. But before that happens, effective solutions have to be created and implemented to eliminate these risks.