3Cryptocurrencies are a major investment, especially among institutional investors. The investment, often part of a trend, has been riddled with high gains and sharp losses. Bitcoin’s prices have fallen rapidly from highs near $20,000, but they have since started to stabilize.
It’s a new market with both advantages and severe risks.
When investing, and there are many benefits for the cryptocurrency investor, you need to know the market inside and out. And what this really means is knowing the pitfalls and risks associated with investing in cryptocurrencies before deciding to invest.
What pitfalls exist?
1. Cryptocurrencies Are Not a Mature Market
Ebbs and flows exist in every financial market, yet when a new market emerges, there are often more ebbs and flows. With cryptocurrency, we have seen this in the form of potential legislation that will regulate cryptocurrencies.
When investors are afraid of government action, cryptocurrencies will fall.
Cryptocurrencies cannot be seen as a mature market just yet, so no one really knows where the market is headed.
With that said, the market is slowly maturing to the point where less volatility can be expected.
2. Exchanges Can Vanish Overnight
As the market continues to grow, it is maturing in several ways, and one issue that still exists is that the exchanges are not 100% guaranteed. What does this mean? You may lose all of your money overnight if an exchange is hacked or goes under.
When picking an exchange, you have to do your due diligence and make sure that you know the risks associated with the exchange.
A good example of this is a bitcoin exchange. Gatecoin shut down recently, citing financial difficulty. The company was hacked in 2016, losing $2 million, and hasn’t been able to recover. Long-standing exchanges with a good history are your safest bets.
3. Less Protection in the form of Government and Regulations
Government and regulations are a main attraction for many investors, but it’s also a downside. Cryptocurrencies are not backed by a central bank or government in the same way that fiat currency is governed. This is why there are issues with exchanges going under.
Cryptocurrencies are stored in wallets, so while they may act like a bank account, they are not offered the same level of financial security. What does this mean? Your cryptocurrency isn’t insured by the government in the same way that money held in a bank is backed by the government.
If you know what you’re getting into when you invest in cryptocurrency, you’ll suffer from less risk and worry. There’s no guarantee that you’ll be able to make money off of your investment, but a lot of people have made money when investing in cryptocurrencies.
With any new investment type, there are always risks associated. Cryptocurrency can, and in many cases should be, part of your overall investment strategy. Seek out well-known cryptocurrencies. Beware of forks to current currencies which may start off hot. As a new currency, there will always be questions of legitimacy initially as the coin matures.