The Biggest Risks of Investing in Cryptocurrency,

What are the risks of investing in cryptocurrency

Cryptocurrency is gaining popularity among investors for various reasons, mostly because of its high returns. Besides, there’re many ways to invest in cryptos. You can hold cryptocurrency short- or long-term, stake your coins or trade them at various exchanges. Read more about the risks of investing in cryptocurrency in the new StealthEX article.

What are the risks of investing in cryptocurrency

What Are the Risks of Investing in Cryptocurrency?

While most people are familiar with common currencies and assets, potential investors are unaware of the vast array of digital assets available or how they work. In this article, we’ll try to sum up the most common cryptocurrency risks.

Short-Term Trading

There’re many factors that contribute to cryptocurrencies’ volatility and they are often impossible to predict, especially if we look into short-term investments.

Another term for short-term trading is aggressive trading. And rightly so: a trader is taking more risk in the hope of making more profit. Investment of any kind requires a constant balancing and trade-off between risk and return, however, short-term investments are especially risky.

Short-term trading can be divided into different categories within itself based on how quickly you realize the profits. Short-term cryptocurrency trading includes profiting within:

  • Hours: The most popular kind of trading, profiting within hours, is when you aim to buy and sell cryptocurrencies within a day and take profit before you go to bed.
  • Days: You won’t have to sit in front of your computer all the time with this time frame. In traditional trading, traders who hold their positions overnight are called swing traders.
  • Weeks: This time frame is essentially what’s called position trading in traditional markets and can be considered the least risky form of short-term trading.

Generally speaking, the shorter the trading time frame, the higher the risk involved with that trade.

High Volatility

Volatility is one of the factors driving the crypto market. If you don’t know what volatility means, it is the sudden shifts in market sentiment that can result in significant and rapid price movements. Volatility is not something typical just for the crypto market. It can be found in other financial sectors, but the intensity and spread are higher in the crypto space.

Peer-to-Peer Transactions

Peer-to-Peer networks have tremendous appeal, but they can also be risky. Here are some of the key disadvantages of P2P transactions:

  • Refunds are virtually nonexistent. With no middleman involved, it’s difficult to dispute charges after the fact.
  • Human errors, like sending money to the wrong recipient, can happen.
  • Unpredictability is another downside. Cryptocurrencies can easily be converted back to dollars, euros or other currencies, but there’s no guarantee that you’ll recoup the original value of whatever transaction you initiated with the P2P currency. 

Loss or Destruction of Private Keys and Cybercrimes

A private key is a cryptographic string of letters and numbers that allows users to access crypto assets, send and receive transactions. Most crypto wallets usually provide a private key in the mnemonic form of a recovery phrase, and according to executives at major hardware crypto wallet firms Ledger and Trezor, the safety of the recovery phrase is way more important than keeping the hardware wallet safe.

Another risk of holding cryptocurrency is cybercrimes. Since cryptocurrencies are fully decentralized, the crypto holders’ safety should be their main concern, especially if the assets are stored in a wallet inside a cryptocurrency exchange. Before entering the crypto world, it is necessary to be aware of these dangers of cryptocurrency.

Lack of Regulations and Tax-Based Concerns

The legal stance of cryptocurrencies poses the ultimate challenge for many governments around the world, leading up to the ultimate question – ‘to regulate or not to regulate crypto assets?’ Some countries, like El Salvador, are making Bitcoin legal, while other governments are trying to combat mining and crypto trading or ban them completely.

There is also some uncertainty regarding the tax status of cryptocurrency investments and returns. Depending on the jurisdiction, BTC and other cryptocurrencies may be classified as assets in certain countries and as currency in others.

What Went Wrong? Cryptocurrency Projects that Crashed

As mentioned before, except for other risks of investing in cryptocurrency, the market is rich with scam projects, crypto crashes and other unexpected events. 

Terra/Luna Crash

In May, the crypto market was shaken to its core as TerraUSD (UST) and its sister project LUNA collapsed in a matter of hours. The projects crashed with a loud bang, wiping out entire fortunes.

LUNA’s crash was largely caused by its link to TerraUSD (UST), an algorithmic stablecoin. However, during the bear market, a large amount of UST was dumped, causing the stablecoin to de-peg. This caused a ripple effect in an already downward market, driving more and more investors to sell and burn UST, thus minting more LUNA. In the end, the two projects went into a deadly spiral with Terra’s native coin losing 100% of its value.

The Tether Conundrum

Users of Tether enjoy its low volatility, ease of use, and relatively stable reference price. Most major crypto exchanges report tens of billions of dollars worth of Tether-denominated crypto transactions every day.

However, despite its attempt to maintain a $1 price at all times, sometimes liquidity drops. The price of USDT has traded in a wide range since its founding. Tether’s price once slumped to $0.001 – this happened on January 22, 2019 on OKCoin with $120,000 dollars cleared on OKCoin’s USDT/USD trading pair. Once the price of Tether blew out any short-sellers’ positions as it skyrocketed to $10 – this happened on December 30, 2017, when USDT traded at $10 per USD on EXMO with $213,000 dollars cleared.

Just recently, on 12th of May, 2022, the Tether (USDT) stablecoin snapped to 97 cents in Asian hours, losing its parity with the U.S. dollar. Its price reached 96 cents on Coinbase, which caused severe panic among traders.

The Bitfinex Hack

The hack of the Hong-Kong based crypto-exchange Bitfinex caused a lot of controversy. In total, over 120,000 Bitcoin (valued at US$4.5 billion at current prices) was stolen in a series of unauthorized transfers from Bitfinex users’ wallets in August 2016.

On 8 February, the US Department of Justice arrested Ilya Lichtenstein and his wife Heather Morgan on suspicion of money laundering and withdrawing BTC from the accounts. If found guilty, the pair can receive 25 years in prison for the fraud. 

The Beanstalk Farms Hack

In April 2022, an unknown individual initiated a series of malicious transactions targeting the Ethereum-based decentralized stablecoin protocol Beanstalk Farms. The exploiter stole various crypto assets from the platform, including BEAN – the protocol’s native stablecoin. The attacker was able to obtain just under 25,000 Ether (ETH), which is worth $76 million. In total, the protocol is believed to have lost $182 million.

Conclusion 

Investing in cryptocurrency is very risky, and while it remains a very tempting opportunity to make quick profits, a crypto investor should be prepared for anything. It’s the modern Wild West, with bandits lurking at every corner and unexpected plot twists. How dangerous is cryptocurrency? It depends on your investment strategy and your common sense.

Inexperienced investors should invest only what they can afford to lose, however, if you plan your investments carefully, the returns may be astronomical.

If you’d like to start investing in crypto right away, you can begin with exchanging or buying assets at StealthEX. You can do this privately and without the need to sign up for the service. Our crypto collection has more than 450 different coins and you can do wallet-to-wallet transfers instantly and problem-free.

Just go to StealthEX and follow these easy steps:

  1. Choose the pair and the amount you want to exchange. For instance, BTC to ETH.
  2. Press the “Start exchange” button.
  3. Provide the recipient address to transfer your crypto to.
  4. Process the transaction.
  5. Receive your crypto coins.
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Don’t forget to do your own research before buying any crypto. The views and opinions expressed in this article are solely those of the author.

Tags: Bitcoin cryptocurrency investing price analysis taxes taxes on crypto
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