cryptocurrency
Bitcoin

Main risks of the cryptocurrency market

If one considers that in 2011, the price of Bitcoin was only US$0.30, and today it is trading at around US$3 600, it’s easy to understand why it has attracted the attention of many serious investors. In the preceding nine or so years after the introduction of Bitcoin, a number of other cryptocurrencies have hit the market. Many people have made huge profits from the cryptocurrencies yet others have lost massively.

So, what differentiates those who have made a killing from those who are left with nothing but sad stories to tell? It is the ability to identify the risks inherent in this otherwise lucrative trade. While some companies have the ability to make a business website and run a legitimate cryptocurrency business, there are others which are taking chances out there.

Cyber risk

While many companies in the cryptocurrency market have invested heavily in ensuring that their systems are not easy to hack, there are a number of other companies that have been hacked before.

Cyber risk is usually quite high when an investor is dealing with a company that does not have much experience in cybersecurity. It is also possible that even companies that may know the risk might not have enough capital to hire specialists or put in place a robust security system to protect investors who conduct business using its resources.

Sometimes, the risk does not even emanate from the company; it comes from investors who are lax with their own security while on the internet. Stockholders who have no means of tracking their cryptocurrency investments are at risk of having their investments sitting and earning money while they have no idea they are accumulating wealth.

Lack of regulation

One of the biggest risks in the cryptocurrency industry has often been the lack of geographic location where markets are based. What this means is that there is often no clarity when it comes to a jurisdiction where any disputes can be entertained.

There is also a grey area when it comes to the way cryptocurrencies will be taxed in the future. Even though a number of countries have entered the cryptocurrency scene with the aim of becoming safe havens and profiting from the trade, there is still a lack of coordination. For investors used to a banking system with clear regulations and dispute resolution mechanisms, cryptocurrencies still pose an uncomfortable risk.

Uncertainty

The value of a particular cryptocurrency depends on the confidence that the market places on it. This is the reason why at the end of 2017 the Bitcoin saw such a high level of turbulence. When countries like China ban the use of cryptocurrencies, many investors are likely to attempt to dump the currency into the market. This results in a massive loss of value.

There are people who enter the market with the aim of speculating and in the process making huge profits. This causes a big risk because cryptocurrencies are not regulated by any central authority such as a central bank. Consequently, the value of any cryptocurrency at any given time is determined by the actors in the market based on the transactions they enter into. What this means is that overconfidence could make certain currencies overpriced while a lack of it can lead a given cryptocurrency to crush.

Slow adoption by business

The risks inherent in cryptocurrencies explain the reason why many businesses in a number of countries are still hesitant to accept cryptocurrency as a means of exchanging value. Businesses already operate in a risky environment and do not want to add another layer of risk.

Businesses are not like individuals who can remain anonymous behind a computer. They have to comply with stringent tax and regulatory regimes. Apart from this, before businesses are able to accept payment in cryptocurrency, they will need to put systems in place. This requires manpower and more capital to manage the risks that come with this.

The resilience shown by cryptocurrencies is an indication that they are here to stay. People and businesses will also take time to accept them as exchanges of value. It is likely that with time, some of the current risks will be mitigated.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Insider Financial and its affiliates, employees, writers, and subcontractors are cryptocurrency investors and from time to time may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency.

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Main risks of the cryptocurrency market
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