What Are the Risks of Investing in Cryptocurrency?

With the advent of digital money, ideas about doing business and personal finance have changed a lot. Cryptocurrencies provide good opportunities for profit, but cause controversy among regulators, and are used for illegal purposes. Investing can result in the loss of funds by inexperienced users. Therefore, many are interested in learning about the risks with cryptocurrency. There are aspects that users need to pay attention to when dealing with digital assets. There is still no legal framework in different countries. Users lose their funds for various reasons.

No Indemnity Guarantees

One of the main problems when dealing with cryptocurrencies is that there is no insurance system for investors' money. Many exchanges call themselves virtual banks but do not reimburse losses. Bitcoin, Ethereum and other cryptocurrencies are all digital money. When they are stolen from virtual wallets, it is impossible to find the thief (due to anonymity). Nor can one claim ownership of the coins.

To exchange money on a cryptocurrency exchange, the user transfers digital assets to the site’s wallet. The coins are stored in the virtual bank system and controlled by it. If it is a hot wallet with constant access to the Internet, hackers and theft of funds are possible.

Clients of the Bitfinex exchange lost 120 thousand BTC in August 2016 as a result of a hacker attack. To save reputation, the head of the trading platform divided the damage between all accounts. For this, 36.067% of the assets were used, and as compensation, users received BFX tokens at a price equal to one bitcoin at the time of the hack.

Exchanges continue to suffer losses from hackers, despite the best efforts of the technical service. Therefore, in order to cover possible losses from mass attacks, payment funds are created.

The danger of cryptocurrency is associated with the inability to cancel the operation and return the amount sent, even if only one digit is incorrectly indicated in the recipient's address. There are no managing organizations, support services or other third parties in the blockchain that could check the information about the erroneous transaction and return it.

Loss of the Secret Code

Losing the secret code from the wallet happens in case of malfunctions, violation of the integrity of the PC hard drive or flash card, where the access code is stored.

Malware

The first such programs were used to attack electronic payment systems (QIWI, WebMoney and others). Now their counterparts have been successfully adapted to the cryptocurrency market. The main methods of fraud with Bitcoin and other coins:

Ransomware: malicious software blocks users' PCs and files, demanding a ransom for restoring access, including in cryptocurrencies.

Viruses: they Infiltrate a computer system, giving hackers remote access to the contents of a hacked PC. During a transaction, the virus changes the recipient's wallet data to its own.

Fake links: the user goes to a fake site – a copy of a well-known exchanger, where he enters the storage data.

What Are the Risks of Cryptocurrency?

Fishing

The goal is to obtain access codes.The user is tricked into a fake website, where he himself specifies the password for the wallet.

Protocol Vulnerability

There are cases when users of the Lightning Network software closed the channel with a node backup created a few days earlier, not taking into account later transactions, and lost their coins. Due to the difference in transaction data, the nodes considered the action as an error. This is possible (and users have confirmed this) due to a lack of electricity that happened a couple of days before the transfer. A software glitch prevented users from applying a more recent backup.

Hacker Attacks

Cybercrime is the main problem in the world. Damage from hackers reaches hundreds of millions of dollars. Fraudsters hack into private bitcoin accounts, wallets of users on exchanges and hedge fund investors.

Exchange Closures

Cryptocurrency risks are associated not only with hackers, but also with internal factors. Since 2012, 50% of exchanges have stopped their work, including large platforms and growing projects. The reason for the bankruptcy of small platforms is low profitability. The founder of the exchanger has to invest large amounts, and the turnover of digital money reaches the level of $100,000 to $1 million. This is not enough to pay off the project. And in order for the turnover of trade to break even, interest fees increase. But this makes the exchange less attractive to users.

Volatility

Cryptocurrency fluctuations are a problem for many. The cost of digital money per day can fall or rise by 5-10% or even more. This makes it difficult to invest in bitcoin, especially for inexperienced bidders. They do not always understand when it is worth selling and buying tokens, and when it is better to stop so as not to risk assets. Digital coins are a tool for making good profits, but only if they are in the hands of experienced traders.

The danger of investing in digital currencies is associated with the decentralized payment system. There is no governing body, no one can maintain the minimum value of coins. If investors decide to sell a lot of coins at the same time, a fall in the price is inevitable.

Market Crash

The rapid growth of the exchange rate at some point may be replaced by a sharp decline. This means that there is a risk of a return to very low values. Price fluctuations and depreciation are influenced by economic and political events. It is very difficult to predict these factors and prepare for them.

Unreliable ICOs

Representatives of the UK Financial Conduct Authority note that users who invest assets in an initial coin offering (ICO) risk losing their invested funds. This is due to the fact that some of the schemes are fraudulent.

The most popular investments in cryptocurrency startups in 2017 were shown in Shanghai and Beijing. There were 65 ICOs, in which about $300 million was invested from 105,000 participants. But in September 2017, China outlawed and banned fundraising through ICOs.

Market Manipulation

When a new cryptocurrency appears, a large investor can invest in it. And for the rate to grow, you need to create a stir around the digital coin. The investor is trying to attract the attention of beginners and experienced crypto traders to it. Indeed, due to the good demand for coins, the exchange rate is growing, and it will be possible to sell tokens at a higher price.

There are also insiders in the digital currency market. They buy from unscrupulous co-founders of projects information about further action plans.

An insider can make good money if he connects with the right people. Offers of exclusive information appear on trading resources.

Mining Profitability

You can receive cryptocurrency as a reward for providing the computing power of computers or special equipment to ensure the functioning of the network of this digital money. "Young" tokens bring a lot of profit. Mining Bitcoin gives a profit after 1 year, Ethereum – 6 months. The term depends on the type of video cards, their capacities.

Today, mining is no longer synonymous with easy money. It is more difficult to mine coins, as the number of computers employed in the bitcoin system is growing. In addition, a lot of electricity is used for the smooth operation of the equipment, which means that the total profit with a large investment of money and time is not so high.

What Are the Risks of Buying Cryptocurrency?

Low liquidity on New Exchanges

New sites are characterized by low turnover.This means that due to the very small supply and demand, when buying a significant batch of coins, transactions with digital money will be carried out at a disadvantageous price, but will affect the value of the tokens.

When trading takes place within the same exchange, problems often arise due to the presence of a large spread - the difference in the selling and buying prices. If, for example, you buy bitcoins for $41,000 and then want to sell them right away, the cost will already be at the level of $40,500. An investor loses $500 on one coin. But there is a way out – the transition to a cryptocurrency platform with high trading volumes.

Risks of Margin Trading

For investment, money borrowed from a cryptocurrency exchange at interest is used. The strongest trading leverage –1 to 100 – is on the BitMex exchange and some other platforms. But with such a large ratio, there are significant risks of loss, and therefore a novice investor should not use credit funds.

For example, an anonymous user of the social network Reddit (his profile is currently unavailable) spoke about his successful trading in cryptocurrencies. He turned 3 BTC into 200 Bitcoins in one year but lost all coins due to margin trading.

It seems that selling digital money to another person (P2P) in order to receive fiat funds is safe: one user sends cryptocurrency, receiving dollars.

But there are cases when a person who received digital coins then canceled the transfer through a bank. But the sent cryptocurrency cannot be returned.

The risk of using cryptocurrency lies in the uncontrolled activity of the exchanger. Having received a lot of money from users, the site can stop making payments at any time. In fact, the exchanger stops working, and no legal regulators will help here.

Technical Problems

The risks of using cryptocurrencies are associated with failures in the activities of exchange platforms. When assets are stolen from accounts due to the actions of hackers or a mistake by a software developer, investors do not receive funds back.