investment

Let’s face it: Jeannie is out of the bottle and there is no doubt cryptocurrencies, coins, digital tokens, and blockchain-based business models are here to stay. And there is a lot of hype around Cryptocurrencies. Because most investors do not know what they’re investing in and expect this to be a “get rich quick” scheme. However, there are quite some Risk for Investment in Cryptocurrency.

Therefore it will become key for every investor to understand how risk interplays with this new industry and the underlying blockchain technology.

Risk for Investment in Cryptocurrency no. 1: Market Volatility

The sharp increase and later the decline in the value of cryptocurrencies in 2017 and 2018 should be examples everyone understand and are well documented.

Example Bitcoin, which peaked at $20,089 on December 16, 2017, is trading at $3,866 on January 5, 2019. It’s a similar story for Ether, Monero, Litecoin and across all other altcoins.

But this is only half of the story.

Volatility in the crypto markets has always existed. We’ve seen plenty of other similar crashes before: In 2011, the first Mt. Gox hack resulted in a 95 percent loss. In 2014, the second Mt. Gox hack led to a 63 percent loss. Ultimately, buying cryptocurrencies could result in losing everything you invested in them.

You should never invest more than you can afford to lose.

Risk for Investment Cryptocurrency no. 2: Regulatory Issues

This is a very young industry with a “Wild West” mentality.

Regulatory and legal issues are two of the big obstacles facing the crypto sector in 2018 and 2019. Because the asset class is so new, governments and financial institutions have not yet formed a legal framework for them. Therefore, there’s a significant risk that the legal status (securities or not?), trading rules, or even outright legality, could change overnight.

To be clear: these uncertainties mean that the money you’ve invested in coins, tokens or cryptocurrency companies carries more risk than your capital in established asset classes.

Risk for Investment in Cryptocurrency no. 3: Coins Might Have a Short Life. Many Coins Will Disappear or Lose Entire Value

The actual number of altcoins represents a significant risk to an investor. We estimate that there are between 2,500 and 3,000 coins in existence.

Coinmarketcap lists 2,086 coins in January 2019, with names like “Halloween Coin”, “Runners Coin” and “Gossip Coin”. And it’s incredibly difficult to know which of those coins have realistic, mainstream, long-term potential. Some cryptocurrency coins are very obvious that they have no chance.

However, there are still very few real-world examples of blockchain and cryptocurrency adoption. Right now, the price of most coins is predominantly being driven by speculation.

Therefore we face the risk, that some Cryptocurrency coins will drop in value significantly or become zero.

Risk for Investment in Cryptocurrency no. 4: Security Offer / Consumer Protection and Exchanges Risks

Most of the cryptocurrency coins or tokens will be regulated either by the U.S. Securities and Exchange Commission, SEC, as a Security Investment or as a usability token under the for Consumer Protection.

Since the exchanges, that trade these crypto coins and tokens might be located somewhere in the world and not regulated, you face the risk to lose your investment.

If your exchange becomes insolvent, you will lose everything.

Similarly, exchanges get hacked on a worryingly frequent basis, often resulting in a considerable loss of money. The big difference for other assets: If something similar happened at your bank, brokerage, or credit card, you’d get your money back swiftly.

Therefore always control the keys for your wallet. Not your keys, not your money! If you keep your investment in an exchange, you will usually not control the keys. Use a secure “cold wallet”, to keep your crypto coins and tokens safe.

Risk for Investment in Cryptocurrency no. 5: Market Manipulation

The markets for cryptocurrencies are very young and as mentioned, mostly unregulated. Therefore a high degree of insider trading, “Pump and Dump”, Bot trading, etc. must be assumed.

You will find many examples with assumed manipulation. So-called “Whales” can significantly influence the prices of crypto coins and tokens in both directions. On a day-by-day basis, crypto coins can increase up by dozens of percentage points within a short period of time, to dramatically fall back to their previous levels a few hours later.

Be wary of sell walls from whales (buying coins cheaply ahead of positive news) and hidden activities, e.g. dark pools (anonymous trading) are common market manipulation tactics. These technics create a considerable amount of risk, especially for “noob” investors who are not familiar with the underlying market mechanics.

Risk for Investment in Cryptocurrency no. 6: Enter and Exiting the Crypto Markets is a Risk

Deposits in fiat to unknown exchanges with a low reputation might include some very high risks. Unregulated, smaller websites and exchanges will not provide you with a customer service level you are used to and there are many examples, where the funds disappeared. However, this is often based on user mistakes, e.g. transfer of Coins to a wrong address or similar, technical errors, etc.

Exiting the markets into fiat might be a similarly high risk, if not done via a trusted and reputable exchange. Some exchanges require a very detailed KYC (Know Your Customer) process, in order to allow you to withdraw fiat money. This verification process can take weeks.

Expect the unexpected: Some exchanges have been accused of withholding funds for vague and nondescript reasons.

Risk for Investment in Cryptocurrency no. 7: Cryptocurrency Scams

A very high risk for newbies are crypto scams. They are widespread in the industry and can be very sophisticated. Some statistics show millions of USD lost to scams in the in 2018.

The four most commonplace scams are fake ICOs, Ponzi schemes, advertising on websites and Twitter bots.

Many new investors trust the details they see on a webpage and don’t perform sufficient due diligence and research. Scammers have an easy game. They create intensive hype around a fake ICO on all channels (Telegram, Twitter, Websites), but once you transfer your Ether or Bitcoin, you will never hear from them again.

Scams are a risk for investors in cryptocurrencies.

You also need to keep an eye for Ponzi schemes branded as altcoins. Some of the most famous include Bitconnect, OneCoin, and Plexcoin have been intensively covered by the media. Want to learn more about scams? Check these Bitcoin scams from last year.

Before you Invest in Cryptocurrency: Know What You’re Investing in

Cryptocurrencies, Crypto Coins or Tokens are not Currencies comparable to the Euro, Pound or Swiss Franc. They are digital assets that are intangible, very often illiquid (small altcoins), often unregulated and always uninsured!

There is no deposit insurance “floor” for this asset class, which will safeguard your investment. Crypto exchanges are often unregulated and located in legislation that prevents them from legal prosecution. In most cases, the Crypto exchanges provide zero investor security.

You need to control your investment. this is not carefree for the time being. The wealthiest crypto investors are going to great lengths to protect their intangible crypto coins by using cold storage devices (e.g. Nano Ledger) placed in physical (offline) vaults.

Given that Crypto Coins are an intangible asset class, human error and something as simple as you forgot or lost your password, can cause total loss of your crypto investment. The risk of being locked out, losing hardware or facing “real-life risks,” such as spilled coffee is often enough to create losses.

Precisely because there are risks in the cryptocurrency market there are rewards. Understanding the potential financial gains of surfing these waves should however not make you blind for the risks involved.

Check our Guide for Beginners with Tips and Actionlists for your Crypto Investment. Learn more about Risk for Investments in Cryptocurrencies.