Cryptocurrencies are a popular investment for many people. They have been around for almost ten years, and the technology is used by millions worldwide. However, you should not take an investment in cryptos lightly. There are many risks that investors need to be aware of before getting involved in the market.
Cryptos can be hacked
One can mitigate the risk of a hack by using cold storage, essentially storing your cryptocurrency offline in an air-gapped computer that has never been connected to the internet. Hardware wallets like Trezor and Ledger also provide a way to store and transfer crypto assets without worrying about hacks.
However, even if you’re diligent with security practices and use all the latest hardware wallets on the market today, there are still risks associated with investing in cryptocurrencies. Especially if you leave your coins on an exchange or wallet service, those might be vulnerable to hackers.
Cryptos are not widely accepted
If you are considering investing in cryptocurrencies, it’s essential to understand that they are not widely accepted.
- Merchants rarely accept them. Merchants only accept payment in prices denominated in fiat currency (USD, EUR, GBP).
- Banks won’t accept them as deposits yet. Cryptocurrencies do not have official status as money and are not considered legal tender in nearly all countries. Banks can be reluctant to open accounts for people who experiment with crypto.
Tax regulations are still being ironed out
Cryptocurrency is still a new technology, and not all tax regulations have been ironed out. As a result, the rules governing crypto investments can vary widely from country to country.
Understanding how your government views cryptocurrencies is essential before investing any significant amount of money into crypto. That will affect whether or not you’re able to report your gains as income or capital gains and how much tax you’ll owe on your investments.
The IRS has declared cryptocurrency property instead of currency. Therefore, they’re treated much like stocks or real estate transactions regarding taxation. So, for example, if you sell something for cryptos (and then convert it into cash), you’ll be taxed on the increase in value between when you purchased the asset and when you sold it.
Bitcoin volatility is high
The amount an asset’s price fluctuates over time is called volatility. A higher level of volatility means that the price will vary more, which means that you are taking on more risk.
Because Bitcoin is a relatively new and unfamiliar asset class, it has high volatility compared to other assets such as gold or stocks. For example, Bitcoin’s annualized standard deviation can be as high as 35%, gold’s annualized standard deviation is roughly 5%, and the S&P 500’s annualized standard deviation is 9%. But, of course, these are mere numbers and may not accurately reflect current market conditions every time.
However, recent years have seen bitcoin’s volatility decrease significantly. For example, the standard deviation of Bitcoin between January 2016 and March 2018 was 92%, but then it dropped by 57% between March 2018 and June 2019. Even in today’s bear market, there is less volatility than expected.
The technology is new and unproven
As a new and unproven technology, cryptos and the blockchain may be risky.
- Many cryptocurrencies have not been thoroughly tested, so there is no way to know if they are safe or secure.
- There is also the risk of fraud, scams, and hacks on exchanges.
- Cryptos can also cause you to lose money if you invest in something that fails or loses value quickly (which happens often).
- You could also lose control over your money if you forget your private keys or passwords.
There are many risks to consider when investing in cryptos
Before investing in cryptocurrencies, you must recognize the many risks to consider.
These risks vary from person to person. As a result, you may find them more or less problematic than others. While some of these risks are similar to those found in traditional investments, others are unique and require a rethinking of how you approach investment decisions.
Still, don’t let this scare you away from crypto! In the same way that evaluating the benefits of investment can help inform your choice whether or not it’s right for yourself—or even if it’s worth doing at all—so too should evaluating the various risks that come with crypto investments.
Although the risks are real, many opportunities come with investing in cryptos.
If you’re considering buying some for yourself or your company, it’s essential to do your research and consider all factors before making any decisions.