Looking at how the Bitcoin and the Ethereum price have evolved over the years, it’s easy to see that both coins have experienced a rapid and substantial rise, and if we were to listen to crypto enthusiasts, chances are they might reach much higher values in the future. That’s reason enough for you to think that diving into crypto might be a good idea. After all, this has become a common activity for people from all walks of life, and many have been generously rewarded for their courage.
Investing in crypto is fairly simple, given the numerous exchange platforms that facilitate the buying, selling, and trading of a wide range of cryptocurrencies. However, ensuring positive outcomes while managing risks and avoiding red flags is less so.
As with all investment endeavors, security should be top of mind when investing in digital currencies, especially since you’re dealing with an asset class that is relatively new compared to traditional investment venues and presents unique risks and challenges that you might not be aware of. So, let’s see what the main threats and dangers are that you should keep an eye out for if you want to enjoy a safe and smooth investment experience.
Volatility
When it comes to crypto risks, the first thing that experienced investors will warn you about is volatility. There’s no getting rid of crypto volatility and it’s not something you should wish for either since this is the feature that gives crypto that profit edge over other types of investments. Without it, earning potential would decrease dramatically and crypto would lose most of its appeal as an investment instrument.
However, market volatility remains a major risk with crypto, one that can lead to disastrous consequences for those who are too reckless or ignorant enough to think they can outsmart market fluctuations that not even the most shrewd financial analysts can predict.
This doesn’t mean nothing can be done about it. There are several solutions that can prove helpful in this respect, with diversification being the simplest and most effective method to counter the potentially damaging effects of volatility. Building a portfolio made entirely out of crypto is like watching a disaster waiting to happen. Including a variety of other assets alongside will help you balance risks, so even if your crypto investments perform poorly, the rest of the assets will offset the losses and keep your portfolio afloat.
Another tried-and-tested method to fight volatility is adopting a long-term investment strategy where you hold your coins for extended periods of time instead of trying to time the market and make frequent trades in pursuit of quick gains. This should help you weather market downturns and gloss over price fluctuations, improving your earning prospects.
Frauds and scams
In crypto’s early days, scams and frauds were order-of-the-day issues. Now that the market is a little more mature and most countries have introduced regulations that oversee crypto-related activities, the risks have been somewhat reduced. Unfortunately, the regulatory frameworks are inconsistent and incomplete and haven’t managed to entirely eradicate these risks or eliminate them to such a degree that would make them almost unnoticeable.
Hacking and phishing attacks are still common enough that you should learn how to protect against them. This means there are malicious entities out there looking for ways to break into investors’ accounts and steal their private keys. Should these keys fall into the wrong hands, investors would lose all access to their funds, with no possibility of ever retrieving them. To ensure you don’t fall victim to these types of attacks, you need to prioritize storage security.
It’s generally recommended to store your private keys on a cold wallet (one that’s not connected to the internet) such as a hardware device or a document, since they can’t be accessed by prying eyes. Using strong passwords and two-factor authentication is also something you should consider for bolstering the security of your crypto accounts.
Social engineering attacks are also quite widespread in the crypto space, so you need to stay cautious and be extra careful when choosing the projects you support. If you ever receive suspicious links or come across an offer that seems too good to be true, look the other way. Make sure you research and verify every information and entity you interact with to confirm its validity.
Low liquidity
No one really talks about the risk of low liquidity, but it’s something you should definitely pay attention to if you plan to invest in crypto. Liquidity refers to investors’ ability to buy or sell crypto assets without causing major disruptions in their market value. Therefore, digital currencies that have lower liquidity levels are more unstable since every time someone purchases or sells them, the prices have to move up or down to make up for the lack of available buyers or sellers.
That’s why you should always check liquidity levels when assessing crypto projects. Coins with a larger market cap like Bitcoin and Ethereum will naturally have higher liquidity levels, so they make for a safer choice from this perspective.
Regulatory challenges
As we’ve already mentioned, crypto regulations are still a work in progress. Even countries that have already developed regulatory frameworks still have trouble figuring out how to govern this asset class, given its unusual nature and the particular challenges it presents. While this might not seem like an issue that could affect traders and investors, it does have direct repercussions on their activities.
As rules and standards differ from one country to another and are subject to constant changes, this creates a pretty shaky ground for investors. These gaps and shifts not only leave room for scams and frauds to spread, but they can also impact the value of digital currencies across jurisdictions, creating a sense of instability and making it more difficult for stakeholders to build effective strategies.
There are plenty of reasons to want to break into crypto, but there are also many risks and hazards to take into account, so don’t undermine the importance of research, preparation, and caution.
