Understanding the Risks in Cryptocurrencies

Cryptocurrencies, just like any other investments, will make you go through risks once you decide to get involved.

Trade 12 - cryptocurrency colored gold with silver coins around
Cryptocurrency is shiny and golden against the other coins around it.

It is basically the same as e-money – such as WebMoney or PayPal – which means that they also have the same problems as that of classic e-payment systems.

If you base it on what other people say or think, you’ll see that cryptocurrency seems to have some potential. But question still arise, will it eventually be able to replace or exist alongside existing currencies? Or has it already been determined to fail like a passing fad?

Knowing how much risk you can possibly take is important when it comes to investing. Read more on Gauging Your Risk Tolerance.

No one can really tell what will happen to the future. No one can say with absolute certainty how long and how successful cryptocurrency will be.

Trade 12 - cryptocurrency system-microchip
Cryptocurrency in the middle of other currencies in a web-like connection.

Here are the top cryptocurrency risks that you, as an investor, should be aware of.

  1. They don’t have intrinsic value.

Cryptocurrencies are mostly similar to flat currencies when it comes to their value, which is zero.

The risk in this one is that the value of a coin is based on a simple demand and supply mechanics, deriving its value from what the market will be willing to pay for. As long as a particular coin continues to gain people’s trust, acceptance, and traction, its value will hold or potentially increase. Nonetheless, if the people do the opposite and lose faith in the coin, it will later fall to its demise and lose its value completely.

Also, unlike commodities such as gold, silver, oil, wheat or cotton which have industrial uses, cryptocurrencies have no other intrinsic function than as a medium of exchange. This then restricts the demand of the virtual commodities which can only be used for its specific purpose.

  1. False payment information and phishing.

The risk, when simply put is theft.

For example, you’re transferring money to a friend. Despite copying his wallet address accurately, the malware can then replace the address in the clipboard with a different one, and most users no longer double checks what they inputted after copying it especially if the address is a long jumble of letters and numbers.

Another one would be phishing. Just like with ordinary e-money, users are still prone to tricks of being led to a phishing website where they will be asked to upload their cryptowallets and enter a password.

Plus, even if you are one of those people that use traditional banks or payment system, you can still run into cybverthieves. Though with these traditional systems, you still have a fair chance of canceling your transfer.

  1. They have no productive value.

Cryptocurrencies were made with the thought of it being a medium of exchange and in itself is a form of commodity. Generally speaking, commodities do not have any productive value since the asset itself can be difficult to put into productive use for earning money.

Also, the concept of banks when it comes to the cryptocurrency world is kind of limited at the moment. There are only few entities that will pay you an interest for the coins you deposit.

Profits from cyptocurrencies will only be taken from capital appreciation or trading it short.

  1. Hacking payment gateways.

Despite you using a genuine payment gateway with the correct address, you can still end up losing money.

Hackers out there can still end up stealing money from you. They can hack into any system that you happened to use and start stealing the money from you under the guise of the trusted gateway that you use. This kind of theft can happen quickly, paving way to a risk where your money will never return.

Such things happening will definitely attract attention, whether from you or the gateway itself, and can start working on a way to gain the stolen money back from the hackers.

Trade 12 - cryptocurrency glowing against other
The cryptocurrency glows bright against the other coins surrounding it.
  1. They are highly volatile.

The open market where cryptocurrencies can be traded make it vulnerable to market fluctuations. Seeing as the adoption of the currencies is still in their early stages, value of the cryptocurrency are still in the risk of swinging in either direction very wildly.

It is not possible for any individual to monitor and make fast decisions if there is any sudden crash. The crash could happen when you’re asleep or have no internet connection and you won’t be able to do anything about it.

High volatility is a risk that all coin owners should simply accept as natural and learn to live with.

  1. Loss of wallet files.

Aside from theft, there is also the possibility of loss of a wallet. Most users keep their wallet information on their computers. As such, these can therefore be easily stolen with malware or lost if the disk crashes.

Most advanced users decide to make hard copies of their secret key and get their hands on USB hardware wallets. But such users are almost nonexistent.

  1. Transactions are irreversible.

The blockchain that enables transactions of cryptocurrencies was designed to be secure, anonymous, and irreversible.

If or when you do end up making an error in cryptocurrency transfers, reversing these actions is impossible.

The coins can be permanently lost if you transfer them to the wrong address or make errors during the process.

The assurances that this will not happen actually rest on you making sure that every transaction you do are correct.

Learn more about the pros and cons of investing in cryptocurrencies.

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