You can’t go 10 seconds in the world of financial news without seeing something about a digital currency. You might have heard about the profits these coins can bring. And we’ve all heard about the risks.
But by learning what those risks are and taking measures to prevent them, we can profit from our crypto assets securely. By the end of this article, you’ll understand some of the cryptocurrency risks and how to avoid them.
What Is Cryptocurrency?
Cryptocurrency is simply digital currency. The fiat currencies we’re used to are issued and regulated by banks and governments. Crypto is regulated by the people who use it via the blockchain (more on that in a moment). You can use cryptocurrency to buy and sell goods, tokenize assets, even hold them as a long-term investment.
The blockchain is a record of cryptographically secured digital currency transactions. It’s a distributed ledger that exists on thousands of computers around the world. Blockchain records get updated on all those devices simultaneously, making them incredibly hard to crack.
The Top 5 Risks of Cryptocurrency
Cryptocurrency is highly secure as a payment method. Still, many traders have concerns when it comes to the risks associated with cryptocurrency investment. We’ve outlined five of them below, each one followed by a potential solution.
One of the most cited sources of concern in the crypto community is increasing regulations. Mid-2021, China announced that they were banning financial institutions from providing cryptocurrency-related services. Soon after, the price of Bitcoin and Ethereum dropped 9% and 14% respectively.
Fortunately, crypto adoption is increasing faster than ever before. Greater adoption rates mean crypto users will have more say in regulating cryptocurrencies.
Market volatility is the most common complaint when it comes to digital currencies. Since there’s no central bank controlling interest rates, cryptocurrency prices can seem almost random.
Trying to avoid the price volatility of the cryptocurrency market but still make a profit? You can try to leverage a grid trading strategy that buys and sells cryptocurrencies at pre-set levels.
Hacking and theft
While hacking a blockchain network is next to impossible, a Coinbase account is a different story. When you trade on an exchange where you don’t own your crypto, you’re putting your assets’ security in their hands. An easy solution to this problem is using cold storage devices to protect the cryptocurrencies you are not actively trading. Popular wallets include the Ledger Nano X or the Trezor One.
Public perception of fraud
Cryptocurrency is untraceable, anonymous, and highly secure. Many believe that this makes crypto a popular tool in money laundering and fraud schemes. To boot, victims of crypto fraud are not as well protected as traditional fraud victims.
Fortunately, greater regulations can mean a safer financial ecosystem for all cryptocurrency investors.
A fork occurs whenever there’s a significant update to a blockchain protocol. Since it makes previously invalid transactions valid, it creates a completely separate blockchain network. Hard forks usually happen when there are high levels of debate and dispute in the crypto community. This could cause more crypto price fluctuations.
The fix? None! This isn’t a bad thing. Being able to rapidly update the infrastructure behind our money is a feature, not a bug.
The Top 5 Most Volatile Cryptocurrencies
Everyone’s measure of risk can vary. That’s why we’ve compiled a list of the five most volatile cryptocurrencies according to Yahoo Finance (at the time of writing).
- Ethereum Classic
Let’s go deeper into each one:
Ethereum Classic is a hard fork of Ethereum that first branched off in 2016 after a major hacking event. Like $ETH, Ethereum Classic is most useful for the development of crypto applications like dApps and smart contract. These applications often have dramatic hype cycles that might contribute to Ethereum Classic’s trading volatility.
Dogecoin was first introduced in 2013 as a way of a) parodying the other Bitcoin clones of the time and b) giving people an approachable entry point into the world of blockchain. Dogecoins are worth less than a dollar, so even small fluctuations cause massive volatility.
Interest from celebrity investors (Elon Musk, Mark Cuban) also contributes to the coin’s instability.
Many cryptocurrencies grew slow and expensive over the years: Algorand was invented in response. Algorand doesn’t involve ‘mining’ in its protocol, so its transaction fees (and eco-footprint) are low.
The Algorand blockchain is also making moves to host stablecoin applications, powered by $USDC.
Filecoin is a decentralized data storage platform. Its distributed nature helps Filecoin protect data from censorship and hacking. Users can sell their storage space to people trying to keep their data secure.
$FIL is a big project meant to take on centralized giants like AWS. Those big ambitions might be behind the coin’s fluctuations.
$HBAR was designed to make it easier for people to create decentralized apps (DApps). The Hedera blockchain itself is a stable platform that supports file storage, smart contracts, and more.
This coin isn’t built on top of a traditional blockchain. While that opens the door to some interesting apps for digital currencies, it may explain the volatility.
Can You Invest in Crypto Risk-Free?
The short answer is no. But you can reduce risk by magnitudes.
The world of crypto is clearly profitable, but many investors are looking to minimize their risk levels first. Luckily, you can employ strategies to profit off your crypto assets and hedge against market volatility.
Dan Hollings’ The Plan outlines a crypto bot investment strategy that leverages grid trading to turn cryptocurrency risk into money in your bank account. Want to learn how he did it? Learn more about it HERE.
Frequently Asked Questions
Is crypto high-risk?
As a standalone asset, cryptocurrencies are much higher risk than traditional investments. However, there are strategies you can use to make your investments less risky.
What are the main risks of cryptocurrency?
Market volatility, unforeseen regulation, and hard forks. These have thus far been the biggest risk factors for crypto investors.
Can you lose money in cryptocurrency?
Crypto is just like any other tradeable asset: you can lose money and you can make money. Depending on the instruments you use, this can be highly risky and highly rewarding.