Bitcoin has high rate of growth as well as fall in this recent times. Other cryptocurrencies have experienced same too. The result of the growth has given rise to more and more investors becoming more interested and therefore considering to invest in cryptocurrencies. Cryptocurrencies are, for the most part, decentralized, unregulated and not subject to any government control.
The biggest difference between cryptocurrency and traditional currencies is that there is no physical representation of the former. A single bitcoin, the most common and successful cryptocurrency, doesn’t exist in a tangible form. You can’t pull it from an ATM or withdraw it from a bank and have a physical coin in your pocket. Instead, it only exists in a digital space.
The regulation surrounding cryptocurrencies has not increased at the same speed either. In fact, the crypto market is highly non-regulated; and this open the doors to high level of risks. Some of those risks includes;
Money Laundering and other Financial Crime
Criminals now mostly use the cryptocurrency market at their leisure to transact criminally. The spread of various anonymous cryptocurrencies are on the rise. Drug dealers now transact between each other with no track-and-trace mechanism in place.
Lack of Investor Protection
There is no mechanism to protect clients, who invest and are subsequently defrauded. The risk is inherent,and doesn’t require further explanation. However, it should raise questions in your head about choosing the correct cryptocurrency coin. It should also force you to think about who you are investing with. As we saw previously, there are ways to get around the system.
‘Pump and Dump’ Scams
Effectively, these are scams that are coordinated to an inside group who will start buying the coin. This first wave of traders cause the currency price to increase. A further message is sent out to other traders with some detail about the currency such as new website. This positive news intrigues traders and signals that the currency is hot. At the same time, as the price rises, the first wave are informed about the news that has been released. The price will increase rapidly, and they will try to sell off their currency as fast as possible. Obviously it makes a return for them. The result of this massive sell off is the significant drop in the price.
Naturally, investors in the second wave likely lose money or in the best case scenario break-even. At the moment, this type of scam remains legal, and happens regularly in the industry. Take care when considering involved in cryptocurrency trading.
Obviously, any investment bears risks, but some are more risky than others. As the industry continues to evolve, so do the risks. As the blockchain technology advances, developers may find ways to integrate risk mitigating pieces within the technology. The unfortunate challenges is that as fast as technology catches up, hackers and others continue to develop ways to get round the blockers.
The Biggest Risk of Investing in Cryptocurrencies are their instability. You do not know, whether you are going to get huge profit or huge loss. Like I always say, only invest what you can afford to lose. Definitely people are making really good profits out of crypto trading/mining. But still you never know when this crypto bubble will burst and all your investment amounts to a huge LOSS!