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What are the risks of investing in cryptocurrencies?

3 min. reading
Bitcoin / 9 April, 2021

Edgar Mondragón Tenorio Journalist

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Since the launch of Bitcoin in 2009, and the gradual emergence of other cryptocurrencies, these have been gaining popularity among the common people and among traditional financial institutions, as well as among large and small investors seeking alternative returns for their capital.

However, it is of utmost importance, as in any investment, to know the risks involved in investing in cryptocurrencies. Let’s analyze them in detail.

How do cryptocurrencies work?

How do cryptocurrencies work?

In October 2008, an individual or group of individuals who would later be known as "Satoshi Nakamoto" released the "Bitcoin" white paper”. His claim is that it will become the world's digital currency, distrusting the FIAT money backed by governments and the International Financial System (IFS).

Risks of investing in cryptos

  • High volatility. Even though behind several cryptocurrencies there are projects, mainly Blockchain technological development, the price of these is largely determined through the supply and demand of these. This price adjustment is influenced by market sentiment over the course of junctures in the crypto ecosystem.
  • Movement of whales. Those who have accumulated large amounts of any cryptocurrency are known as “whales”, it is important to take them into account since their movements, both buying and selling, affect the crypto market sentiment, and can cause large variations in the price of cryptocurrencies.
  • Lack of regulation. It should be remembered that, strictly speaking, these financial securities are so only for those who accept and recognize them as such. This is important because, so far, cryptocurrencies are financial instruments not recognized by any government and, therefore, they are not regulated by any governmental or financial institution.
  • Liquidity. As they are speculative securities with such volatile prices, there is a risk that they do not have the necessary liquidity to face massive withdrawals from investors without affecting, downwards and in a short time, the price of these cryptocurrencies.
  • Lack of acceptance as a means of payment. This is since cryptocurrencies do not have the characteristics of fiat money that are necessary for them to be used as a unit of account and store of value. The lack of government recognition, the constant variation in their price, and the lack of acceptance among the masses, are factors that prevent cryptocurrencies from ceasing to be speculative objects to become money, in the strict sense of the word.
  • Exchanges, frauds, and cyber-attacks. Being unregulated assets, cryptocurrencies require intermediaries for their transaction, unfortunately on many occasions these “exchanges” may not be the most suitable ones and may be fronts for frauds or have deficiencies in their cybersecurity systems that will end up in the theft of the complete wallets of their users.
  • Loss of passwords. This is a problem that came to light during the last Bitcoin bullish episode, especially among those who bought this cryptocurrency from the beginning, when they realized that they had lost the access passwords to their wallets, and therefore lost the possibility of claiming their profits.
  • Forks. Roughly speaking, a fork refers to a change in the Blockchain protocol used by the cryptocurrency. These changes can be hard or soft. The case with the greatest impact is that of a hard fork, since it implies a change such that the chain will split in two, causing the creation of another cryptocurrency, which will necessarily affect the price of the original coin.

These are the main risks to consider if you decide to invest in any cryptocurrency. The crypto market is new and immature, and the dangers are latent and developing, as much as the benefits on offer.

However, the cryptocurrency market is still in its infancy and offers great opportunities. As the risks are reduced, it will become an increasingly interesting asset to invest in.

 

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