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4 big risks you need to know about cryptocurrencies
By James Yeo
Cryptocurrencies continue to lure novice and professional investors with huge rewards. Bitcoin and Litecoin surging by more than 1,000 per cent since the start of the year all but attests to the hype in the sector. The value proposition has made cryptocurrencies some of the most sought-after investments in the world.
Just as it has always been the case with investments boasting of astronomical returns, it may be time for would-be investors to first understand the risks associated with cryptocurrencies investments before venturing into the space.
1. Speculation Risk
Astronomical price gains around cryptocurrencies have mostly been supported by speculation rather than solid fundamentals. Just as is the case with any investments built on speculation, any decline in hype could trigger an unexpected crash resulting in adverse effects to unknowing investors.
In fact, Bitcoin has fallen hard from an all time high of US$19K+ to US$13.4K at the time of writing. This translates into a 30-per-cent plunge within a week.
Apart from speculation, there is also a high risk of fraud, given that cryptocurrencies are not controlled by anybody. Misinformation and a lack of clarity have already given rise to Ponzi schemes that claim to double people’s money over a short period.
2. Extreme Volatility
Cryptocurrency prices have been extremely volatile posing great risks to investors who don’t know what they are doing. The levels of volatility have most of the time rendered it impossible for clear-cut analysis, much to the surprise of professional investors.
The extreme volatility has already aroused suggestions of a bubble forming in the space, even as investors continue to maintain a blind eye. Experts have already warned that a bubble burst in the cryptocurrency space could trigger the next financial crisis given the amount of money streaming into the sector.
3. Unregulated Space
The cryptocurrency space is one of the few forms of sectors that is not regulated by any major authority in the world. In case the unfortunate happens and all investments are wiped out, investors may have to bear all the risks even if it happened in a fraudulent way.
Hackers have already hacked a number of cryptocurrencies and siphoned millions of dollars’ worth of cryptocurrencies, an indication of the risks that the sector continues to face.
4. Legal Tender
Very few central banks in the world have approved cryptocurrencies as legal tender. While they have not been declared illegal as well, the lack of clarification has had a significant effect on cryptocurrencies areas of application. While they are commonly used to complete transactions online, very few brick and mortar stores accept them as a way of settling payments.
The fact that they are not backed by any major legal entity makes them risky investments given the limited applications. Cryptocurrencies exist in digital form which means they lack the physical representation that has made physical currencies popular.
Conclusion
Cryptocurrencies face a lot of uncertainty given the hype in the sector. Global bankers and experts have already raised the red flag about the possibility of a bubble bursting in the space.
“It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed,” said JPMorgan CEO Jamie Dimon.
On the other hand, the likes of John MacAfee remain optimistic about cryptocurrencies in the long term given how the underlying Blockchain technology will power most of them forward.
Which side will win? Only time will tell.
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