Know the Risks of Cryptocurrencies before You Invest In Them
With cryptocurrencies making such a dramatic entry in the world of finance and both Bitcoin and Ethereum shooting up in value in record time, other assets have taken a backseat. Armchair investors are justifiably awestruck with the Bitcoin and everyone wants a slice of the pie. No surprises then why the financial industry has been scrambling to buy and sell crypto coins. But just like the previous real estate bubble, this time too investors are not well aware of the risks of the assets they may be chasing.
How to identify and manage risks in the cryptocurrency world:
Before you invest in cryptocurrencies, it makes sense to evaluate the risks involved. Unlike real estate markets, these crypto assets are extremely new and most conventional financial firms still do not have access to the crypto market. The market is being mainly used by fintech companies. But even these firms are learning the ropes and they are still not in a position to help the less-experienced clients handle risks of crypto assets.
Crypto assets are essentially a combination of technology, financial tools, and an internet-enabled network. This is why you cannot isolate crypt risks from technology risks. While financial risk management is needed to manage liquidity, diversify portfolios and avoid asset bubbles, technology risk management is needed to prevent hacks.
The prices of Bitcoin keep fluctuating and businesses offering financial services will have to exercise fiduciary responsibility by teaching investors and supervising portfolio recommendations where crypto coins are involved.
The crypto market is also marked by high liquidity risks. Exchanges like Kraken and Coinbase have met with roadblocks being ill-equipped to handle liquidity problems. These problems are magnified as investors who cash out of cryptocurrencies are unable to deposit their money because of safeguards linked to fraud prevention and money-laundering.
In terms of technology risks, while the blockchain technology is the driving force behind the crypto coins, when this technology becomes outdated, the related crypto assets may become invalid. So, risks of obsolete technologies may be a big factor for financial firms to look at.
Using the blockchain involves some unique risks because of the private keys which are really strings of characters in cryptic format. When investors lose this private key the crypto assets cannot be exchanged; so the loss of private keys translates into loss of crypto assets forever. In the blockchain there is no super user password or central authority and nobody can overwrite changes once made. This heightens cyber security threats.
One method to minimise the risks of cryptocurrency trading and investment is by consulting reviews from trusted sources. For example, the automated trading tool Bitcoin Evolution. Many of these types of tools exist in the marketplace and by consulting reviews you can ensure you're only investing in tools with a higher chance of a postive return on investment.
The crypto market is in its infancy and it does not still have all the mature functions typical of regular financial markets. So it is hard to identify who owns a certain amount of crypto assets since the private key cannot be accessed. Besides, there is a lot of difference in legal frameworks concerning cryptocurrencies amongst countries. Since cryptocurrencies can be present anywhere in the world and any country can start producing these, there are huge fluctuations in values. Countries who ban crypto coins will try to block access to their routers, while some others who have poor infrastructure may have slow transactions.
To sum up, cryptocurrencies constitute an emerging market, one that is full of prospects and challenges. It remains to be seen whether financial firms embrace these and incorporate them, whether regulators and governments give a go-ahead. When traditional institutions will step in, they will introduce sound risk management protocols.