Cryptocurrencies are currently on everyone’s mind as a possible investment opportunity that is likely to bring in great rewards. To a great extent, the hype is both real and necessary as such currencies need more people to accept and use them. The more people and businesses jump on to the bandwagon, the more these digital currencies gain traction and stabilize.
While the advantages of investing on and using cryptocurrencies are many ranging from difficulty to counterfeit and decentralized system, it also comes with its fair share of disadvantages. The blockchain technology that the most commonly used Bitcoin uses ensures that the ethics of counterfeiting or greed can be coded into the technology of the currency.
Knowing the dangers of cryptocurrency investing is the first step towards mitigating the aftereffects if the bubble ever bursts. Understanding the interplay between the risks posed by investing in these currencies and the economic factors of the emerging market stands to help both investors and market regulators. So without further ado, let us take a look at the few market risks of investing in cryptocurrencies.
Low Barrier of Entry
The advent of Bitcoin in popular consciousness as a legitimate alternative to regular currency and the consequent rise of other cryptocurrencies have democratized financial transactions. This has lead to a lowered barrier of entry into investment in digital currencies that currently number over 1600. Everyone can invest in any number of digital currencies.
But the opportunities for the liquidation and exit from such asset portfolio can be narrow due to lack of compatible trading partners and currency inconvertibility. This can make your investment and the process of gaining future returns from it quite hassling. Investors often gain a lot on the value of the digital coins they acquire but while selling off have to settle for lower than market value returns.
This asset class offers low investor security. Due to the decentralized nature of the block-chain technology, there is no necessity of double counting by a middle agent such as in the case of transaction carried out through banks. But this also makes it so that all financial transactions and investments on digital currencies intangible and massively underinsured. As such, entrepreneurs buying cryptocurrencies through real money are not insured and have no security.
Susceptibility to Cyber Extortion
Due to the lack of widespread knowledge about cryptocurrencies amongst regular people and casual investors, such investments are particularly susceptible to misinformation and cyber extortion. While nobody wants to lose money they have acquired, single-party investors have been known to fall prey to misinformation drives and losing their coins. As their investments are uninsured as discussed in the previous point, this can leave people with barely any way to reacquiring their money.
Keeping these risks in mind while investing in cryptocurrencies can go a long way in ensuring that private and individual investors know to expect the pitfalls caused by them. As long as you are aware of the risks you can the necessary steps to mitigate or avoid them.