Are there dangers when investing in cryptocurrency and what are they?

Sunday, August 15, 2021

Are you looking to invest in a cryptocurrency?

By now most of us have heard plenty of stories, some good and some bad, about how people have set themselves up for life, or destroyed their hard earned savings by investing in a cryptocurrency.

Well if you are interested in investing in a cryptocurrency, you are doing the right thing by researching around the subject before diving in. It’s important to see both sides of the coin and evaluate the situation, imagining how you would cope and deal with different outcomes. So to find out more about the dangers of investing in cryptocurrency, read on below.

Are there dangers when investing in cryptocurrency?

In short, yes there are quite a lot of dangers that need to be navigated. The majority of these dangers range anywhere between financial risk and getting scammed. As a potential investor, you need to understand your situation extremely well. You need to analyse your current financial position and work out if you have the capability to invest safely. This means that you are able to invest money that if you lose, you are not going to be cast into debt or unable to keep up with the everyday purchases that have to be made to live your current lifestyle. So to sum up this first danger, people are at risk of causing themselves harm if they are not in a position to invest, meaning they are investing money that they can’t afford to lose.

The above point is applicable to all forms of investing, however it is even more so when discussing cryptocurrencies. This is because cryptocurrencies are extremely volatile and the price of a unit can vary dramatically from one moment to the next. This is why there have been a lot of stories about people making millions, whilst others have lost millions.  There are many things that can impact the value of a digital currency, some of these include rumours, the way unregulated exchanges operate, and even the opinion of billionaires. One of the main reasons for this is that because cryptocurrencies are so new, it is very difficult to assign a concrete value to them. By this we mean there are cash flows associated with other stocks and bonds, however this is much less so with cryptocurrencies.

We touched upon this point in the last section, but there is another risk to cryptocurrencies because they are unregulated. While this may change in the future, cryptocurrencies are currently not regulated by governments or a central bank. One of the counter arguments to this risk is that most cryptocurrencies are deliberately decentralised as a way to remove power from central institutions, leaving the market to look after itself through self regulation and blockchain technology.

Arguably the biggest risk comes from unregulated exchanges, with people staking more than they can afford to lose. We touched upon this earlier, but there is more to a lack of regulation than what was originally mentioned. Some of the exchanges that people use to trade cryptocurrency are able to get people into serious financial trouble. For example, one major exchange froze just as prices were slipping and people were unable to sell their coins. The result of this was that people lost their life savings alongside other major repercussions.

Further to this, some of the offers that unregulated exchanges provide involve complicated mathematics that can cause a person to risk a lot more than they realise. For example, leverage can sound like a great deal when it works in your favour. However, in the same way that it could help you earn more money, leverage can also make you lose more money if the market takes a negative turn.

If you are looking to invest in cryptocurrencies, then you have to think of it objectively and not like a game. It might be exciting to see your money go up, but this shouldn’t be an excuse to get carried away. Education is the key to successfully and happily investing in cryptocurrencies. It is important to know exactly what you are doing. There are many ‘gurus’, ‘experts’, and people possessing ‘industry secrets’ out there, and you should avoid their advice completely and know to read multiple sides of an argument to get a clear understanding of what you are heading into.