If you have investing about N1 million in bitcoins in January this year, chances are that the investing will be worth about N2.6 million today. Bitcoins are indeed 160% up year to date. Ethereum, another cryptocurrency has even fared better. If you invested N1 million in Ethereum in early January, that invested will be worth a whopping N45 million today. The coin has risen from about $8 earlier in the year to $375 as at June 19th, 2017.
The value proposition of cryptocurrency has made it one of the most sought-after investments in the world. For a lot of Nigerians looking to get in, the upsides are too much of an attraction to bother about the downsides. However, like any investment, especially those that yield astronomical returns, there are certain risk that you need to be aware of before you invest.
Six of the most common and most dangerous risks involved in cryptocurrencies are what we go on to discuss.
It is like a commodity – Trading Cryptocurrencies are like trading commodities or precious metals. Unlike investing in shares or fixed income securities, they do not generate income and dividend, which are alternative sources of returns. The only way you can make money from a cryptocurrency is if its prices go up which is determined by the forces of demand and supply. For passive investors or those looking for an investment that yields a steady income stream, Cryptocurrencies are not option.
Exchange Rate Risk – Investing in most cryptocurrencies from Nigeria often requires that you pay with dollars and not Naira. Also, the exchange rate that is used is not the regular black-market rate or official rates published daily. Buyers and sellers of cryptos have their own exchange rates, so you must be very careful to ensure you are not caught up in an exchange rate loss.
Proliferation of cryptos – Whilst, Bitcoins and Etherum are perhaps the most popular cryptos there are up to a 1000 cryptocurrencies around the world with each trading on its own value. This however does not suggest that the recent bullish sentiments in the cryptocurrency market translates to positive gains for every coin out there. Remember, the ability of a crypto to post positive gains or losses depend largely on how popular it is and who the backers are. Don’t fall victim by buying a crypto that is not common. One way of determining what currency to buy is looking at its market capitalization. The larger the market cap and trading volume, the likely it is that you can easily sell it whenever you wish.
Price Volatility: One can buy cryptocurrency now and in just about the time it takes you to use the restroom and get back, you lose everything including your capital. For example, as recently as May 25, Bitcoin has plunged 13% in just a few minutes. To put this in perspective, anyone who had invested N10 million would have in a few minutes lost N1.3 million. Similarly, about a week ago, Bitcoin lost 16% of its value in one day. Cryptocurrencies are highly volatile investments and react widely to market information and news. For example, the recent gains experienced in the market is largely attributed to the adoption of cryptos by some Asian countries. In the same vein, the share drops are occasioned by negative news such as the news that broke last week which claimed wallets are being hacked.
Fraud/Theft: You would always meet unscrupulous elements in every business and the thing is, there are several of them in this business. For instance, on Remitano, selling to unverified buyers could land you into huge problem- sometimes, you don’t get your money or your bitcoins and these people disappear into thin air. Other times your bitcoin is transferred to the wrong bitcoin wallet and that is it for you. In addition, the issue of keeping these currencies safe from hackers is another risk. Just recently Ethereum, suffered a plunge in value when a hacker exposed weaknesses in DAO’s Ethereum construct and stole over $50 million. The price of Ether was nearly cut in half from the incident. Similarly, the problem of safely storing your cryptocurrency is there, with virtual and physical thieves ready to steal them.
Regulatory restrictions et al.: In compliance with the CBN directives discouraging bitcoin trading, banks have clamped down by seizing huge lumps of cash from individual accounts amounting to millions of Naira. It has even gotten to the extent that certain bank employ people with the job description of tracking funds connected with bitcoin trading. They do this effortlessly and only freeze your account when you have a large sum of money sitting there, telling you that you got it through fraudulent means. UBA and GTB and are most of the time guilty of this act. So, under the ruse of ‘its CBN directives’, they could cart away millions monthly. On the other hand, these bitcoin trading forums or the bitcoin wallet sites charge a lot of money for inter-trading and bitcoin wallet fees as well as transfer of money and bitcoin fees which puts a considerable dent in actual amount (capital and profit) versus amount after payment of fees levied according to your transaction and irrespective of its frequency.
While many will continue to see cryptocurrencies as the new trading unit, it is important that anyone who wishes to invest does so with both eyes open and aware of the risks associated with the business. High gains come with several risks.
