What are the risks associated with cryptocurrencies in 2021?
If you are unsure about cryptocurrency risks or what action you should take, we recommend that you seek financial advice from a duly authorized independent financial advisor. There is no guarantee of the market value of cryptocurrencies, such as bitcoin. There is no way to predict how much a cryptocurrency will be worth next week or next year. There is no entity in charge or capable of sustaining the asset’s price on the international market.
Since cryptocurrencies are a relatively new species of digital currency, many countries have limited information. There is always a potential for risk as well as a high level of uncertainty. If you use cryptocurrencies to store value, you can always risk losing some or all of your money if the value of the digital currency suddenly drops.
System risk associated with cryptocurrencies
It is one of the most significant cryptocurrency risks. If there is no responsible authority, how can we trust that they will not steal our accounts? How can we be sure there will be no fraud? Who guarantees the functioning of the network? All of these questions are pertinent concerns. System security depends on three main mechanisms – modern cryptography, peer-to-peer networking, and the set of incentives contained in the protocol.
Modern cryptography provides a high level of security through mathematical proof. The entire mining process is based on cryptography. As mining is a competitive process, the more computational power invested in the network, the more complex the cryptographic problem becomes. The P2P network takes on the task of propagating transactions quickly.
Through it, all participants become aware of new transactions, making each one hold a trustworthy and always up-to-date copy of the blockchain. The set of incentives ties all these elements together. Network vulnerabilities, software bugs, and difficulties in updating the system can all negatively affect the price of cryptocurrencies in the market.
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Portfolio risk associated with cryptocurrencies
Another fact associated with cryptocurrency risks is the usability risk. There are countless cases of loss of cryptocurrencies due to forgotten passwords, misplaced pen drives, or formatted hard drives. For this reason, our immediate answer to those who ask us to learn how to invest in digital currencies is to learn how wallets work, become familiar with them, understand the various forms of storage, and make the necessary backups before directing resources relevant to this digital currency.
A bitcoin unit is a digital currency or an asset that resides as a simple record in the blockchain. There are no actual bitcoins in users’ wallets. What each keeps with them are the private keys that allow the holder to transfer bitcoins. With the backup, one can import the wallet and recover the funds efficiently.
There are different wallets available to users. Companies with advanced services offer customers debit cards capable of spending funds from an online bitcoin wallet. For those who want more security, there are hardware portfolios. On these devices, private keys are generated and stored. Furthermore, they use multiple signatures, which provide even more protection to the user. Most of these wallets allow backups that can be used in any other software.
Falsification of payment information and phishing
Imagine that you transfer an amount to a friend. You copy the address from his wallet precisely, but malware replaces it on the clipboard. Not every user is connected to the point of noticing. Through malware that masquerades as an e-money service, users can be tricked into loading their crypto wallets on a phishing website, thereby providing their password.
On top of that, even using an open payment gateway with the correct address can result in lost money. Hackers use social engineering methods to convince the hosting provider that they own the domain. Upon gaining access, they begin to intercept cash flows.
The market risk associated with Cryptocurrencies
The price is determined by the laws of supply and demand in specialized markets around the globe. In determining the price, part of the equation is known in advance by all participants in the system. However, we cannot predict how the demand for digital currency will behave. Thus, market accessibility is one of the leading cryptocurrency risks associated with investors.
Nothing assures us that the cryptocurrency holders will not wake up tomorrow with a different opinion, starting to consider bitcoin as nonsense that must be spawned at any cost. Nor can we be entirely sure that a new digital currency will not emerge, a new competitor capable of supplanting bitcoin.
Additionally, we must not underestimate the impacts arising from possible harmful or even prohibitive laws and regulations. Volatility is inherent in this market risk. Given the unpredictable demand, the asset’s price fluctuates a lot. Market risk will always be present. Some aspects can be mitigated more than others can.
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Tips for cryptocurrency holders investors
- Always check the wallet address and click on links claiming to be from virtual banks or web wallets.
- Before sending, check the recipient’s address, the amount transferred, and the magnitude of the associated fee.
- Write a phrase that allows you to recover a crypto wallet if you lose or forget your password.
- Stay calm and make informed decisions about your investments. Do not panic.
- Always remember that crypto investments are hazardous.
- Do not risk more than you are ready to lose.
- Use cryptocurrency wallet hardware.
- Use quality antivirus protection to protect devices used to access crypto wallets.
The idea behind cryptocurrencies is to replicate the properties of physical money in a digital environment. Hence, the name given by Satoshi Nakamoto is Bitcoin – a peer-to-peer electronic cash system. A bitcoin wallet can store any sum of money, equivalent to tens of dollars or millions, and all with the same functionality. It implies special care and a change of attitude, inevitably.
How much to deposit in each portfolio depends on each one. For regular investment, a Smartphone wallet is enough. However, for more significant sums, it is more prudent to use hardware wallets and paper wallets. It all depends on the amount of capital invested and the risk profile of each one. We always encourage crypto investors to consult with professional financial advisors about investment policies and cryptocurrency risks.