What Are The Risks Of Cryptocurrency?
This information is not meant to provide investment or financial advice as Howlader & Co are not investment professionals. The digital currency market may experience a high degree of volatility. Clients should be aware of the risks associated with cryptoassets and consult with an investment and/or legal professional before any investment is made. Howlader & Co cannot guarantee future financial performance.
The popularity of decentralised cryptocurrency has risen exponentially over the past decade or so, and since Bitcoin’s inception back in 2009, myriad other popular cryptocurrencies have been created, including Ethereum, Tether and XRP.
But as popular as they have become, they’re not without risk.
With that in mind, we’ve compiled three of the main risks of cryptocurrency.
Market volatility and instability
Cryptocurrencies are particularly prone to market fluctuations and, as such, can prove a risky investment.
Why are they so volatile? Well, there are several reasons.
Growing number of cryptocurrencies and lack of trading hours
Firstly, there are still a rapidly growing number of cryptocurrencies coming onto the market in their rapid growth stage.
Another reason is that crypto markets are active at all hours; they’re not beholden to set trading hours like traditional stock markets, for instance.
A little Tweet can go a long way
More than perhaps all other assets, cryptocurrencies and their value are also easily impacted by the thoughts and opinions of others.
Elon Musk is a prime example of this, with one singular tweet of his referencing that he’d perhaps grown less fond of Bitcoin causing its value to plummet in the hours that followed.
The risk of ‘whales’
Because newer cryptocurrencies also tend to be distributed between fewer large-scale investors (also known as whales) these investors can easily influence market value with their own actions.
With Bitcoin, for instance, when you consider that a report from the National Bureau of Economic Research (NBER) found that 10,000 bitcoin investors control about one-third of the bitcoin market, then you can understand how the actions of a few can impact the market on a more macroscopic level.
Cybersecurity concerns
Cryptocurrencies have also come under fire in recent times as a result of their questionable cybersecurity record.
Some of the major concerns are as follows:
Phishing attacks
Operating in a solely digital space, the world of crypto is particularly vulnerable to phishing attacks.
These operations involve malicious parties purporting to be a credible organisation, a trading platform for instance, and getting you to click on a link.
These methods can be used by hackers to gain access (either directly or by means of blackmail) to your crypto wallet.
Illegitimate platforms and cryptocurrencies
You need only take a look at One Coin, which was supposedly (according to the platform’s owner, at least) the ‘next big thing’ in crypto, before turning out to be one of the most brazen multi-level marketing (MLM) schemes in history, to see that not everything is always as it seems in the world of cryptocurrencies.
As transparency is so crucial to the idea of cryptocurrencies and blockchain technologies more generally, it can be easy to take whatever you see at face value, lulled into a false sense of security by that foundational pillar.
Crypto-malware
Threat actors can install crypto-malware onto the device of an unknowing victim, and then use said device to mine for cryptocurrencies.
Such malware can be targeted at anybody, not just those with an interest in cryptocurrency, making it doubly frustrating to deal with.
The major result of an attack like this is a severe loss of computational power.
Poor environmental record
Undoubtedly one of the biggest negatives relating to cryptocurrencies is their environmental impact.
Bitcoin mining alone, for instance – has an energy consumption of 101 TWh per year.
This places it between Ukraine and Egypt with regards to its electricity consumption and accounts for almost 0.5% of global electricity consumption.
Given that this energy is predominantly generated by cheap coal production, this seismic consumption of energy translates into seriously heavy carbon emissions.
While an exact emissions calculation is incredibly difficult (if not impossible) thanks to the decentralised nature of cryptocurrencies, their environmental impact is already undeniable.
Final thoughts: the risks of owning cryptocurrency
There’s no doubt that cryptocurrencies are here to stay, and they certainly have their positives as an asset; lower transaction costs and greater transparency across the board being just two.
But with that said, there are risks of cryptocurrency specific to the asset class.
If you have any more questions about cryptocurrency, make sure you speak to a team of expert crypto accountants UK.
To get all your finances in order, get in touch with Howlader & Co today!