There are currently more than 420 million global cryptocurrency users.
A lot of people have made huge amounts of money through crypto, and more people are seeing the appeal every day. Before you start investing in cryptocurrency, however, it’s important to bear in mind that many people have also suffered significant losses.
No investment is perfect, and there’s always a degree of risk involved. When it comes to crypto, a lot of people don’t have a good understanding of the space, and this can result in bad investments.
In this guide, we’ll cover some of the biggest cryptocurrency risks, as well as some significant rewards, so you can make better decisions. Keep reading for more.
Table of Contents
Potential Cryptocurrency Risks
Many people are still against cryptocurrency. This comes partly from a lack of understanding, but it’s also due to the risks involved.
Illegal Transactions
Cryptocurrencies are highly private and secure, and while this is a benefit, it’s also a noteworthy risk of cryptocurrency. It can be difficult for the authorities to track down the owners of digital wallets, so it’s often hard for them to deal with illegal transactions.
In the past, crypto has been used to buy drugs and other illegal substances on the dark web, for example. Criminals can hide their tracks more easily, and if you somehow end up losing money due to criminal activity, you may not be able to get it back.
Volatility
This is another factor that can be both good and bad. Crypto is considered highly volatile, so the price can go up and down very quickly. Some people are able to make financial gains off of this, while others suffer losses.
Having a good investment strategy will help reduce the risk here. Timing the market well can produce great results, but it’s very tricky, even for experienced investors. If you want to try day trading, you should ensure you have a good understanding of the various factors at play before investing any sizable amount of money.
Potential Data Loss
There are various ways you can store your crypto. The most secure method is using a hard wallet, which is a physical device. The next best option is a soft wallet which works as a browser extension or smartphone app.
The risk with these, however, is that if you lose your wallet’s private key, you might never be able to access your crypto again. There are examples of people who now hold millions of dollars worth of crypto, but can’t access it because they’ve lost their password, rendering it essentially useless.
It’s important to make sure you keep passwords/seed phrases completely secure at all times. Never let anyone else get ahold of them as they could then steal your crypto.
Hacks and Scams
This is one of the biggest risks and has resulted in people losing millions of dollars in the past. One of the reasons you should avoid storing your funds on a cryptocurrency exchange is because if they get hacked, you might lose all of your crypto. Keeping your coins in soft/hard wallets can help you avoid this.
There are also various scams in the crypto space that criminals are using. Being aware of the most common scams will help you stay safe and avoid falling victim to them.
Potential Cryptocurrency Rewards
You need to be vigilant and have a good understanding to keep your level of risk to a minimum. Before you invest in cryptocurrency, you should also be aware of the potential rewards that come with it.
Easy Transactions
Compared to other types of transactions, crypto transactions are typically cheaper, faster, and more secure. All you need is a smartphone application and you can send however much you want to anyone else in the world.
In most cases, a transaction will take just a few seconds. Sending money through a bank wire transfer, for comparison, can often take up to five working days.
Cross-Border Payments
On top of transfers being fast and secure, there are also no restrictions in terms of national borders. You can send Bitcoin to someone sitting right next to you, or to someone on the other side of the world, and it will make no difference.
There are also no international transfer fees or currency exchange fees to worry about. It’s worth noting that certain countries have restrictions in place, so this isn’t possible in 100% of cases.
Exponential Industry Growth
Bitcoin was launched less than 15 years ago. By 2020, the crypto market was valued at $826.6 million and is expected to reach $1.903 billion by 2028.
Early investors have benefited greatly, but those who choose to invest now could still see sizable profits. It’s good to keep an eye on the value of different coins. Plenty of websites allow you to observe the values of different cryptos, such as Ethereum price CAD, for example.
Portfolio Diversification
All experienced investors know that having a diverse portfolio is essential as it helps to minimize risk exposure. Adding crypto to your portfolio will give you an additional asset class.
The crypto market is currently considered uncorrelated as it operates autonomously. This means that the price isn’t generally affected by the value of other assets. As such, if you have other assets that crash, your crypto may retain its value.
Managing Cryptocurrency Risks
Just because you know how to invest in cryptocurrency, that doesn’t mean you should yet. It’s important to have a good understanding of cryptocurrency risks before making any big decisions. Do your research and always understand what you’re investing in if you want to be successful.
For more finance articles, check out some of our other blog posts.
