Traditional investors tend to characterize crypto as a speculative asset. The first cryptocurrency, Bitcoin, was created only in 2009 and many newer tokens do not even have a working product released yet. However, the crypto ecosystem connects rapid innovation and creative ideas. It attracts the best minds from business, coding, cryptography, and other disciplines essential for successful project development. Unfortunately, the fact is that it has also drawn talented hackers and other scam artists into the sphere. Moreover, like any new technology, it is hard to distinguish successful projects from those that will not survive bear markets. Thus, it is easy to see why crypto seems so risky as an investment option for many.
Investment Risk
There are several misperceptions related to crypto. First, like any other investment, crypto has investment risks. Cryptocurrencies are undoubtedly risky options in the sense that they have high volatility, which means that the initial investment can grow manifold and likewise lose a lot of its value in a relatively short period of time. However, it still has to be noted that different tokens also have different risk characteristics – it is unrealistic to compare Bitcoin with low-cap altcoins issued by a nascent blockchain project without a use case or a userbase.
While Bitcoin prices may swing up and down, its value has risen steadily over the last decade. It has proven its use case and has a very large base of token holders, including sovereign nations, global banks, private wealth funds and retail investors. Newer tokens present a greater risk and return than Bitcoin because they have to prove their use case, governance model, adoption rate, and acceptance by the market over time.
It is necessary for any crypto investor to understand the project behind the token they are investing in. People who invest in shares analyse the company they are investing in. Likewise, crypto investors need to know whether a project has a good chance of delivering on its promise.
It was popular in the past to exaggerate the risks associated with crypto investment. For example, some tokens have the most successful adoption rates and network effects of any recorded technology, proving that their future use is inevitable. It is also untrue to say that there are no use cases for crypto: blockchain technology is already being offered as a solution by technology giants like IBM, and used extensively in the logistics industry and financial industry. All this is on top of ongoing adoption of applications in smart contracts, decentralized finance (defi), NFTs, payments, data storage, and more.
Operational Risk
As an investment option, crypto also has operational risk, usually associated with uncertainties and hacks related to owning and storing personal token assets. In the same way that people can be scammed or robbed of their fiat money, there are people who lose their cryptocurrencies because they are not aware of the necessary security and privacy measures relating to owning crypto.
From 2017-2019, “crypto” scams were very common. These scams involved selling ponzi schemes or other kinds of bait to the victims and claiming that it was a “crypto investment”, when in fact there was no blockchain technology involved at all. As the public became more aware of the nature of these scams, and the authorities began to arrest and convict the scammers, the number of such scams dropped drastically. From 2019-2021, crypto-related fraud fell by more than 60% per year.
While anonymity is one of crypto’s main advantages, anonymity is also desirable to scammers who try to take advantage of crypto rookies. It is possible to trace and blacklist stolen tokens, but it is much harder to connect the tokens and wallets to an individual criminal, which means that the stolen tokens might be gone forever. But, these problems, too, can be solved, and the primary way to do it is by education about security.
Regulatory Risk
The third investment risk commonly linked to cryptocurrencies is regulatory risk. Despite their decentralized nature, cryptocurrencies and the entities behind them are regulated differently by individual countries. Crypto ecosystems have, for example, encountered mining and trading bans from governments and lawsuits from governmental agencies. News of negative regulatory decisions can deteriorate the reputation of the tokens and affect their prices considerably. However, it is also worth noting that good regulations can be beneficial to the crypto market because they make the market safer and more stable.
In addition, taxation can be risky and problematic for individual investors. For example, some investors may not file their taxes because they are deliberately evading taxation or because they lack understanding about their tax obligations or tax procedures. Individuals that get caught up in non-payment of taxes may suffer legal consequences and significant fines. Those with less financial education are more prone to forgetting or not taking these mandatory measures seriously.
However, with widening public education about crypto and rapid normalization and integration of crypto markets into the global financial and taxation system, the impact of these risks will fall over time.
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