Cryptocurrencies have now been around for quite some time. Yet, most people are not much aware about how it works. Concept of cryptocurrencies can get quite complex for someone who is just starting out especially, with the new forms which are coming up daily.
Before, you start trading in cryptocurrencies or use it for your business it is better to understand the basics of it. Most countries do not regulate crypto currencies, but it doesn’t mean that they are illegal. Cryptocurrencies are not like physical cash which can be redeemed but they are digital in nature and provide an option of being a global currency.
However, it has its own risks which you should consider before you start investing in Bitcoins. Let’s have a look at these risks in detail:
1. Security Concerns
Cryptocurrencies are only in digital world and don’t exist in physical form. They are a piece of code. They need to be stored in wallets. If your wallet gets hacked, you will lose all your money. This has happened multiple times and some of the biggest Bitcoin exchanges have borne the brunt of this. Mt. Gox was one of the biggest Bitcoin exchanges in the world. It handled more than 70% of the transactions. One day, it announced that 85000 Bitcoin had been stolen. It then, filed for bankruptcy. Similar thing happened to an exchange based in Hong Kong. This happens every now and then. In addition, Bitcoins are not regulated in most countries which leaves investors with minimal remedial measures.
Therefore, if you plan to invest into them you must make sure that all safety measures have been taken. One such measure is downloading the cryptocurrency on your pen drive or hard disk to avoid it from getting stolen.
2. They are extremely volatile
Cryptocurrencies can be extremely volatile in nature. They can move 100% and even more up and down in a single day. Cryptocurrencies don’t have any circuit limits like stock and bond markets. There is no lower limit to the amount of money you can lose. Consider for example- Movement of Bitcoin in previous 2 months. In this period, it has moved from $4500 to $3000 in just 2 days and then back from $3000 to $5600 in just a couple of weeks. If you look at the overall movement in these 2 months it has more than doubled This shows the volatile nature of Bitcoins.
A solution to reduce risk is to have auto stop losses. If the price falls below this point, system will automatically sell these and similarly a target should be set just to avoid the fact that, if it falls before you can sell it off.
3. Cryptocurrencies don’t have any fundamental backing
Definition of asset says that for anything to be an asset, it needs to have a fundamental backing. Currencies like Dollar, Euro, Pound etc., commodities, bonds, stocks all have a fundamental and physical backing. Cryptocurrencies don’t have any backing. All the things, which don’t have any physical backing come to 0 in the long term.
You can understand this with the help of an example. In the 1600’s prices of Tulip went very high as people thought that Tulips are the next big thing. They even became more expensive than Gold. But suddenly it came crashing down to zero one day. This is what happens, when any investment doesn’t have fundamental value or physical backing
4. Tracking of Cryptocurrencies is difficult
You might be aware if anything gets transferred or stolen from your credit card or bank account it can be easily traced back to where the money has been taken. But, the same doesn’t apply to cryptocurrency.
If the cryptocurrency is stolen, it is very difficult to track it at present. This, is also the reason why it is used for terror funding and illegal activities.
5. Risk of accepting tainted money
Suppose, you have an online business and you also accept payments through Bitcoins then, there can be a risk at some stage. This, is because you don’t know who is the real owner of that cryptocurrency. It can be a hacker, terrorist or someone else who is just trying to use this illegal transaction to get services.
Also, if you are an investor and receive tainted money then there is very less you can do to justify yourself.
6. Be a victim of a Ponzi scheme
Bitcoins are not regulated in most countries. Hence, governments have very little control over these Ponzi schemes being run. You might have heard of emails promising return double the investment or something similar, all these are a part of hoax mail and a method of grabbing your money.
The fact is there can be no guarantee in cryptocurrencies because of the volatility. Hence, any such claims that your money would be multiplied are just false and could be another scam.
7. Lose Your Money If a Coin Is Banned
If you belong to a country where there is a risk of cryptocurrency being banned and government not being in favour of it, then you can lose your money overnight. This is what happened to people who invested in China, South Korea or Venezuela. Stock exchanges for cryptocurrencies were shut and Bitcoin companies were asked to shut overnight. This can be a terrible situation for investor and thus, you should decide after taking this into consideration.