Last Updated on June 21, 2023
Cryptocurrency may be a decent investment if you’re willing to understand that it’s a high-risk bet that could pay off or cost you your entire investment. In 2022, cryptocurrency prices, especially bitcoin, have been decreasing due to a global crypto price meltdown.
It is critical to proceed with caution before investing in bitcoin or other cryptocurrencies. If you want to invest in cryptocurrencies, go with the facts rather than the hype — and there is enough of that. Know the hazards before buying and selling digital currency so you can decide if it’s a wise investment for you and your personal money.
Early investors in cryptocurrencies like bitcoin are likely to have profited: a £310 investment in one bitcoin in April 2016 would be worth almost £24,000 six years later. Bitcoin’s price rose through 2021, peaking at slightly under $67,000 in November, then plummeting to $29,000 (£23,700) in May 2022. Even if one bitcoin is worth more than £310, it demonstrates how fickle even the most popular cryptocurrency is. Bitcoin’s price has been declining in 2022, as part of a larger cryptocurrency sell-off, as investors avoid riskier assets in the face of rising inflation and interest rates.
New cryptocurrencies, the majority of which use blockchain technology, are constantly being released. Some are designed to replace traditional currencies like the pound or the dollar, while others are used to develop new forms of financial applications or to exchange value between other digital currencies.
If you’re thinking about investing in digital assets, take a hard look at each project to evaluate how it might turn out. Are you purchasing a completely useless digital coin or something that provides novel solutions to existing financial issues? If you’re new to digital assets, check out our beginner’s guide to cryptocurrency trading.
Read: All You Need To Know About Cryptocurrency
What are the risks of investing in cryptocurrency?
Almost every country’s government and financial regulators have warned investors about the dangers of owning cryptocurrencies.
Investors rush in without considering the hazards when an investment appears in headlines, commercials, or through celebrity endorsements as a means to make money.
High volatility
One of the variables that drive the crypto market is volatility. If you’re unfamiliar with the term, volatility refers to unexpected fluctuations in market sentiment that can cause big and rapid price movements.
Volatility is not limited to the cryptocurrency market. They can be seen in other financial sectors as well, but the severity and spread are greater in the crypto realm. The significant volatility in the concerned asset class is due to a number of factors, including its young structure when compared to other types of investing.
Market risks
Crypto assets, like other commodities, are vulnerable to market volatility. The hazards associated with bitcoin trading are divided into two categories: systematic risks and unsystematic risks. Because the crypto markets are inherently risky, the systematic risk exists in all cryptocurrencies. A change in the company’s fundamentals could be an example of unsystematic risk, which is exclusive to a single crypto asset.
Cyber risks
While cryptocurrencies may herald the start of a new era, it also has a less-publicized counterpart: cybercrime. Because cryptocurrencies are completely decentralised, crypto holders’ cyber hygiene and security are paramount.
In the crypto world, “abnormal disappearances” and ransomware attacks are both intricate and fast-moving threats, and newcomers to the ecosystem are frequent targets. As a result, it is vital to be aware of these risks before entering the crypto world.
Decentralization
One of cryptocurrency’s most enticing advantages is its lack of a central authority. However, this absence has disadvantages, particularly when things go wrong. Electronic money transmission, for example, is frequently backed and administered by a financial institution in most online financial transactions. So, if an issue arises with the transaction, you may easily contact them and have it resolved.
This is not possible with a cryptocurrency transaction. Its decentralised design makes determining the proper entity to initiate a transaction dispute difficult. As a result, most cryptocurrency traders are encouraged to use trusted digital currency exchanges.
Read: What is Asset Allocation and How to Apply It
Risks Associated with Peer-to-Peer Transactions
A peer-to-peer (P2P) platform is a cryptocurrency exchange that directly links buyers and sellers of bitcoin. Any cryptocurrency transaction on a P2P exchange is paid directly between the two parties.
These exchanges are one of the most straightforward methods for converting cryptocurrency to fiat currency. However, it is the human component that can result in the loss of your asset. Furthermore, scams and fraudulent schemes are always a possibility, such as a buyer refusing to pay for bitcoins acquired or a seller refusing to provide tokens, and so on.
The best method to prevent most of these schemes is to choose a P2P platform that offers a digital asset escrow service. The platform holds the cryptocurrency during the transaction using this service. When the buyer completes the payment procedure and the seller verifies receipt, the asset will be released to the buyer. This ensures that both parties receive what they desire. A platform representative will settle any disagreements that occur.
Unregulated Trading Platforms/Exchanges
As cryptocurrencies have grown in popularity, so has the number of cryptocurrency exchanges and trading platforms. Choosing an exchange has thus become more complex. Cryptocurrency exchanges provide the financial market with the same degree of service as traditional financial institutions.
However, in crypto trading, the lack of government monitoring has fostered the establishment of fraudulent exchanges and market manipulation. Some trading exchanges charge expensive fees and have no regulations in place to prevent manipulative or suspicious trading, while uncontrolled exchanges may engage in predatory behaviour.
Exchanges may levy high charges while simultaneously making withdrawals difficult. Others may have lax security, making it easy for con artists to take your money. Finding trading platforms and exchanges with reliable security and positive evaluations is the best method. Always read the small print of their terms of service and stay away from platforms that make outrageous claims.
So is it wise to invest in cryptocurrency?
That depends on your risk tolerance level because while analysts warn investors about cryptocurrency’s volatility and unpredictability, some investors are ready to take the risk in exchange for a possible return. It’s crucial to do your homework before deciding whether or not cryptocurrency is good for you. Join an online community of cryptocurrency investors and aficionados, such as the one available on Reddit, to discover what the community is talking about. Read the white paper for more information on the cryptocurrency project you’re considering. If your project doesn’t have an easily available white paper, consider it a red sign.
Consider why you’re interested in this particular investment vehicle, and educate yourself on cryptocurrencies and blockchain technology so you can decide if this type of investment opportunity is right for you.
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