Yesterday, a sudden crash in the price of Bitcoin and other cryptocurrencies reminded everyone of the nature of risk involved in investing in crypto assets.
According to an earlier Nairametrics report, altcoins like Etherium, XRP, Dogecoin, Polkadot, and Litecoin all lost significant value and this loss may not have been unconnected with recent announcements from the US, UK, and Turkish Governments seeking to look into the use of cryptos for money laundering activities and in the case of Turkey, its controllability by the central bank.
Overall, here are 3 major risks associated with investing in cryptos.
Cryptocurrency prices fluctuate arbitrarily, having no intrinsic value. They are strictly digital assets that are neither backed by a physical commodity or currency. Their value is determined by how much people want or don’t want them.
If there is a sudden increase in demand for a particular cryptocurrency, its price goes up. In the same manner, if for any reason most people decide to start selling off a particular cryptocurrency, its price drops instantly. The fact that there is no authorized or recognized regulatory body for all of this makes the matter worse and increases the risk of Market Manipulation. What this simply means is that there is no investor protection.
After acquiring or investing in cryptocurrencies, there is the small problem of where to safely store them. Unlike traditional money or shares which can be easily stored in banks or with stockbrokers, crypto traders have limited options and digital wallets remain the most widely adopted storage method.
However, a recent study by Chainalysis, a data company, estimated that about 20% of cryptos are either lost or stuck in digital wallets due to the challenges of forgotten passwords. This was reported by Yahoo Finance’s UK reporter Oscar William-Grut. According to the reporter, this adds up to about $140bn worth of crypto investment tied up in inaccessible digital wallets.
Fraud and hacks
This is without a doubt the biggest challenge facing Nigerian cryptocurrency investors. The likelihood of getting swindled in the Nigerian crypto market is quite high with so many fraudulent elements posing as cryptocurrency exchange markets.
There is no regulatory oversight and 95% of the transactions on the cryptocurrency market are done online. According to Yahoo Finance UK, about half a billion dollars was lost last year through hack attacks targeted on Crypto Exchange companies.
What you should know
Everything that has value always comes with its associated risk. While cryptocurrency still remains a smart bet, it is important to have the above risks in mind while investing.