While cryptocurrency opens the doors to countless investment and financial instruments, because of the lack of guaranteed value, as well as its digital nature, there are risks involved that you should know about before you get started.
Barry Sibert, CEO of Digital Currency Group (which builds and invests in Bitcoins and blockchain companies) says “It is pretty much the highest-risk, highest-return investment that you can possibly make.”
Here are some of the risks you can incur:
Regulatory Risks: Bitcoins are a digital rival to government currency and, thus, may be used for illegal activities, black market transactions, money laundering, or tax evasion.
Governments, therefore, might seek to regulate, restrict, or ban the use of such currency (some already have). Other governments are coming up with various rules concerning cryptocurrency.
Security Risks: Most people who own and use Bitcoins have obtained their currency through any of many popular online markets, called Bitcoin exchanges. These are entirely digital, so as with any other virtual system, are at risk from hackers, malware, and even operational glitches.
Hackers may target these exchanges and gain access to thousands of accounts and digital “wallets” where Bitcoins are stored.
Users can only prevent these risks by storing their currency on a computer not connected to the internet or by choosing to use a “paper wallet” where they print out the Bitcoin private keys and addresses without keeping them in a computer at all.
Insurance Risk: Currently, cryptocurrency exchanges and accounts are not insured by any federal or government program.
In 2019, one dealer and trading platform (SFOX) did announce they’d provide Bitcoin investors with FDIC insurance, but only for those transactions involving cash.
Fraud Risk: Bitcoin does use private-key encryption to verify owners and register transactions, but scammers might try to sell fake Bitcoins. There have also been documented cases of price manipulation, which is another common form of fraud.
Market Risk: As with any other investment, Bitcoin prices can fluctuate. In fact, Bitcoin value has seen wild swings since 2009.
There is also plenty of competition for Bitcoin, and a technical breakthrough in the form of a better virtual coin is always a threat.
If you’re looking to invest in cryptocurrency in an ICO (Initial Coin Offering), you should ask yourself the following questions:
- Who owns the company? Is it a recognizable name or an identifiable owner?
- Are there other major investors already in?
- Will you own a stake in the company or just currency or tokens? The former means you’re an actual owner in the company, while the latter just gives you cryptocurrency to buy or sell.
- Is the currency already developed or is the company trying to raise money to develop it? The further along the product is, the less risky it will be.