Are you considering entering the Cryptocurrency market? There is a whole new universe of potential financial thanks to cryptocurrencies like bitcoin and Ethereum and the number of smaller rivals. There is no question that the cryptocurrency economy is fascinating, but you should approach it with extreme care. Not just because of the dramatic price fluctuations they experience, but cryptocurrencies are still seen as highly speculative investments.
Investors should thoroughly understand the numerous dangers associated with cryptocurrency investments before becoming involved in the market. This article will provide a summary of the dangers associated with cryptocurrencies, including the risks associated with technology, the risks associated with regulatory uncertainty, and other concerns that might influence the value of your investment.
Price volatility
The value of cryptocurrencies is subject to huge swings from one week to the next and even from one day to the next. As an illustration, the price of bitcoins fell by thirty percent on May 19, 2021, shortly after the Chinese government began cracking down on bitcoin mining and trade.
Prices of cryptocurrencies may also go up or down depending on a variety of variables such as shifting public attitude, the latest events around the world, mainstream acceptance, protocol updates, imminent legislation, hacks, scams, and other things. In addition, cryptocurrency is a relatively new asset class, and the market is currently in the process of discovering prices for assets of this type.
Technology risks
Decentralization, cryptography, and consensus processes are integrated into blockchain technology to certify transactions are authentic. No blockchain is 100% safe. Regularly backing up and securing your crypto wallet protects against computer failure, device theft, and blunders, such as unintentionally deleting it. Software errors, data problems, and 51 percent attacks (when crypto miners take over a network’s computer power) are tougher to secure against.
Quantum computing, the next generation of computer technology, worries investors and developers. Its computer capacity might help malicious actors attack crypto wallets, falsify transactions, or rewrite blockchains to modify transaction records. If that happens, crypto prices may plummet or disappear. Ethereum and other crypto companies are working on post-quantum cryptography.
Low liquidity
How quickly an asset can be converted to cash is called liquidity. Smaller, younger cryptocurrencies are less liquid than equities and bonds. That means trading or cashing in your digital currency may take longer than you’d want, even though crypto marketplaces run almost 24/7. Slippage is the difference between the expected and actual trade price.
Slippage might occur if the bid/ask spread changes frequently while you wait for your deal to be filled. “Positive slippage” occurs when the actual price is lower than projected. “Negative slippage” occurs when the confirmed price is more significant than projected.
Trading cryptocurrencies sometimes involves a phenomenon known as slippage, and the amount of it often varies from 0.05 percent to 0.1 percent. It can reach 1 percent for cryptocurrencies known for their high levels of volatility. Check if your cryptocurrency trading platform provides limit orders, slippage estimates, and warnings. Doing so will help you prevent or decrease the impact of negative slippage.
Scams and fraud
Scammers and fraudsters are abusing the public’s rising thirst for crypto. QuadrigaCX, a crypto asset trading company, collapsed in 2019 after its founder’s alleged fraud and mysterious death. Investors lost CAD$169 million. Or maybe you heard about Squid Game, the 2021 “rug pull” scam that took $3.3 million from customers who bought a coin named after the beloved Netflix series. Fake trading platforms, Ponzi schemes, tech support scams, malware, and pump-and-dump.
Too many little crypto ruses exist. According to the Canadian Anti-Fraud Center, investment scams will cost Canadians at least CAD$163.9 million in 2021. Most victims invested in bitcoin after viewing fraudulent adverts. Be skeptical of crypto “investment opportunities,” even from trusted sources. Scammers hijack social media accounts and try to scam pals. Avoid ICOs and airdrops (free token distributions). These events invite fraud and fraud. Learn how to report this and other scams.
Crypto hacks
Cybercriminals have stolen hundreds of millions of dollars worth of crypto coins from investors, blockchains, and cryptocurrency trading platforms. A number of high-profile hacks have recently grabbed international news. Ronin Network, a gaming-focused blockchain, was hacked in April 2022, stealing more than $600 million in cryptocurrency.
One of BitMart’s hot wallets was hacked in December 2021, resulting in the exchange theft of US$200 million. Additionally, advanced attacks like SIM swapping, cryptojacking, and crypto-clipping have been used against individual investors.
Legal and regulatory uncertainty
The decentralized nature of crypto blockchains, intentionally designed to be the case, presents investors with opportunities and challenges. Because there are no intermediaries, cryptocurrency transactions may be completed more quickly and at a cheaper cost; however, this also implies that any governmental or financial organizations do not back cryptocurrencies.
Governments are regulating crypto everywhere. Due to the absence of a regulatory framework, investors have no legal options available if something goes wrong with their investments. In contrast, the Canadian government monitors and protects investors in other types of investments.
Joe Biden signed a long-awaited executive action in March 2022 to explore digital currency. Biden’s directive wasn’t the crypto crackdown many feared and might provide the sector clarity, stability, and safety. Canada’s cryptocurrency regulations are changing. The Canada Revenue Agency (CRA) considers crypto a commodity. Other governments prohibit crypto or use it as legal money.
Human error
News headlines are littered with instances of cryptocurrency owners who lose or forget their private keys, shutting themselves out of their digital vaults. Not backing up a crypto wallet, sending crypto to the wrong address or blockchain, transferring the false coin, and “fat finger” errors when customers buy the bad asset or write the incorrect price. An investor unintentionally sold a Bored Ape NFT for $3,000 in December 2021, one-tenth of his original price of $300,000.
He told a CNET reporter he’d lost focus. Crypto corporations make fat-finger blunders like sending the wrong money, paying exorbitant fees, or mistakenly flooding the market with more cash. In 2019, rope, a dollar-pegged stablecoin, experienced the latter. The corporation burned its extra tokens, but the miscalculation frightened investors so severely that bitcoin’s value dropped—another danger.
Income taxes
Crypto mining and staking have tax ramifications, as do non-fungible token trades (NFTs). Bitcoin profits are taxed as capital gains or business income depending on your crypto activity. Traders, spenders, and givers of cryptocurrencies may not realize they owe taxes, fines, and interest for years.
