Risk for an investor who invests in cryptocurrencies is not just the market risk or the price risk. Cryptocurrencies are fairly new and more complex assets that have some more risks associated with them. Investing in Bitcoin (The Original Crypto) is a trending topic but you should only invest in any asset after assessing its risks. If you are investing in cryptocurrencies like Bitcoin, you not only risk losing money in the value of crypto goes down. You also tend to take on some additional risks as well.
Bitcoin is the largest and famous cryptocurrency that works on the blockchain network. As the whole network functions online, one cannot physically damage or steal them but there are other methods using which online miscreants can try to steal your cryptos. Hacking and cyber frauds are common phenomena in cryptocurrencies. This is due to the fact that many individuals and institutions store their cryptocurrencies on an online wallet which can be accessed through the internet.
Here are some of the risks associated with Bitcoin
Online hacking and fraud
Bitcoin and any other cryptocurrencies are susceptible to online scams and frauds. Hackers can access your wallet if it’s not protected by proper authentication. As cryptocurrencies work on a decentralized network, recovering stolen currencies is virtually impossible. The buying and selling of Bitcoin is gaining popularity and many shady exchanges take this opportunity to steal your Bitcoins in the process of trading. A lack of transparency makes the system even more dangerous because once your tokens are stolen, it is extremely to track them back to their owner.
Attack to the Bitcoin network
Bitcoin is definitely secure but it has undergone multiple attacks to its original framework. Although only one critical attack has taken place in the lifetime of Bitcoin, it doesn’t mean it cannot happen again. In 2010, a flaw in the Bitcoin network was discovered. It was then used to mine more than 184 billion Bitcoins, against its limited supply of 21 million. Though this was resolved within hours and the damage was reversed. This shows that Bitcoin or any cryptocurrency can be severely attacked and made worth extremely less.
Possibility to be locked out of your own wallet
Bitcoins and other alt-coins are intangible assets which mean that have to be stored on a digital wallet. These wallets have a unique alpha-numerical code. This code is essential to obtain access to your wallet. Unlike brokerage accounts where you can generate a new password. A crypto wallet has no such feature. If you forget your password or wallet key, your cryptocurrencies are lost forever. There is no way to retrieve them once you forget or lose the private key.
Another way in which you risk losing your cryptos is while entering an incorrect wallet address. While transferring crypto coins like Bitcoin, you need to enter the exact wallet address of the recipient wallet. If you fail to replicate the wallet ID, the token will be lost forever.
Cryptocurrencies lie in an unregulated area in most countries. You are bound to pay the capital gains tax on the gains made on any cryptocurrency. But no solid regulation categorizing Bitcoin and other cryptos in an asset class. If the Central banks and the government decide to increase the taxes or impose other taxes on cryptos. That might be a negative factor for all crypto investors.
Price and Volatility risk
Apart from all the external risks, the price risk is one of the greatest concerns for Bitcoin investors. Being a young asset, the price of Bitcoin is extremely volatile. Massive swings of 20-40% are common in cryptocurrencies which make them unsuitable for low-risk investors. Bitcoin has crashed by more than 50-70% multiple times in its entire lifetime. This makes trading and investing in it quite dangerous. You can analyze the book value or the underlying value in the case of Stocks but you cannot do the same in Bitcoin. The price depends solely on supply and demand. The price of Bitcoin will only increase if another individual is willing to offer a higher price.
These were some of the crucial risks associated while investing in Bitcoin. It might be believed that Bitcoin is a disaster-proof asset, but that’s not the case. Numerous crypto projects have failed in the past. Although the chances of failing are considerably low for Bitcoin, still nothing is certain. Governments or Banks might decide to completely ban the currency, or there could be other technological advancements that might overtake the Blockchain technology.