4 Major Risks in Cryptocurrency Investments
Cryptocurrency is a type of digital currency which is secured by cryptography. This cryptographic system helps to run online transactions smoothly based on Blockchain technology, without having any central authority.
This network of cryptocurrency is spread across a vast number of computers. The decentralized nature of the cryptocurrency system makes it faster and cheaper to transfer money.
However, along with many benefits of cryptocurrency investments like, inflation prevention, high transactional speed, usage of Gift Cards, cost-effective transaction, and so on, there are also many risks.
The risks in cryptocurrency increase mainly due to decentralization and anonymity. The 4 significant risks in cryptocurrency investments are related to volatility, regulation, decentralization, and taxation. Let’s discuss it in detail.
1. High Market Volatility Risk
Market volatility in cryptocurrency is similar to booms and busts in any other market movement. It can be the result of sentiments, speculations, and manipulations.
Wild speculations may fuel or drop the future of the cryptocurrency market. A single tweet or negative news story about cryptocurrency prices may drop their value.
Media influencers and strong or influential investors play a keen role in manipulating prices. Volatility in crypto assets like Bitcoin makes it difficult for investors to develop confidence.
2. Lack of Regulation
Crypto investments are not regulated by the government or such other regulatory bodies, which may result in the loss of all investments.
Lack of regulation also comes in when investors lack a clear understanding of tax obligations. It also leads to scam exchanges and market manipulation in crypto trading.
In cryptocurrency investments, there is a huge risk of becoming a victim of online fraud and scams. Resultantly, investors fall prey to the Ponzi Scheme, which is a fraudulent investment where earlier partners pay from the contributions of later ones.
3. Decentralization Factor
Cryptocurrency investments function on the decentralization mechanism, which makes them resistant to manipulation.
This decentralization factor becomes tricky in crypto investments because there is no mechanism of backing up or meditation from any financial institution in case of any fraudulent activity. Whereas it is possible in the case of traditional investments and the presence of central authorities.
4. Taxation Risk
The IRS view cryptocurrencies as property. These cryptocurrencies are considered capital assets which leads them to tax regulations.
Although, not all cryptocurrencies are tax-bound. Still, crypto investors of cryptocurrency like Bitcoin, have to report the source of income on tax returns. However, these laws of cryptocurrency can be complicated and stricter.
Final Words
Cryptocurrency investments have both benefits and risks; that’s why crypto investors should have the proper knowledge and a clear understanding of the risks before investing in cryptocurrencies.
Along with the benefits like safe and fast transactions, it can be extremely risky to invest in cryptocurrency, and you must be prepared for any eventuality to avoid serious consequences.
If you know more peculiar risks in cryptocurrency investments, feel free to share them with us in the comments section.
