Cryptocurrency: Inherent Risks

Snapshot

• Business Risks
• Risk of Fraud
• Operational Risks
• Market Risks

The most distinctive feature of cryptocurrency is that it is decentralized, meaning not issued or regulated by a central authority; theoretically, making it completely resistant to any manipulation and interference from the government. Cryptocurrency is based on the blockchain platform, which is a public ledger comprising of information related to all cryptocurrency transactions. It enables all the investors in the crypto market to keep track of their cryptocurrency transactions. 

It is also necessary for us to identify the risks that are associated with cryptocurrency. Thus, some of the inherent risks for the cryptocurrency are: 

Business Risks

There is a high degree of uncertainty associated with cryptocurrencies due to their nascent nature. Investors have shown a great deal of interest in cryptocurrencies, seeking to gain short-term or long-term profits from crypto holdings. Cryptocurrencies are not backed by any government, financial institutions, or any assets; the value of cryptocurrency is completely dependent on the interest of the people in the currency. If there is a loss of interest for investors in cryptocurrency, its value will drop significantly.

Risk of Fraud

Since its early days, Bitcoin has attracted a lot of criminals, to use Bitcoin as a means of transaction or to target people, holding cryptocurrencies. Hackers will use different methods (such as phishing, spoofing, and malware) to gain access to crypto wallets, crypto exchanges, and individual computers to steal cryptocurrency. Investors have to depend on their computer security systems, or security systems offered by the third party to protect their cryptocurrency holdings. 

Another risk associated with cryptocurrency is its high reliability upon unregulated companies, some of these companies may even lack internal controls, due to which they can be more vulnerable to frauds than regulated financial institutions. 

The scope of recovery is also very little in the case of cryptocurrencies. If a user somehow loses his private keys, he will not be able to access his cryptocurrency holdings and if the keys fall into wrong hands, all the money from the user’s wallet will get stolen. Once the transaction has been verified, it is impossible to recover the lost money.  

Operational Risks

In cryptocurrency, there is no way that a transaction once executed can be undone. Also, all the accounts in Bitcoin are cryptographically secured, so in case, if the keys to the account are lost, stolen, or deleted by the owner, he will not be able to access the money in his account. 

Market Risks

Cryptocurrency is traded on demand so it is susceptible to market risks. The limited supply of cryptocurrency means that it can face liquidity concerns and is also vulnerable to manipulation because of limited ownership. Cryptocurrency is highly volatile, lack of alternatives and limited acceptance are only making it more volatile.    

Disclaimer: The article should not be considered as any financial advice. It is advisable to conduct thorough research before investing.

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