Crypto 101: 5 Biggest Risks In Using Cryptocurrencies

Cryptocurrency is undoubtedly one of the biggest technological innovation from the last decade. It has brought big economical changes to many industries today. More and more platforms are being developed to cater different cryptos and their functions. And people are eager enough to versucht die Software depending on their needs while dealing with these digital money.

Some business have flourished because of these digital coins. Some business even run over the concept of developing crypto platforms and new cryptocurrencies. A full world of trading and investment have sprouted from it as well.

Sounds fascinating, but cryptocurrencies also has risks and problems. These pitfalls have brought huge headaches to many investors, and have caused business to financially stumble. Hence, cryptocurrency investors always put extra caution while investing or trading to avoid substantial losses.

And if you want to venture on the world of cryptocurrency, you must be extra careful as well. That’s why know the biggest risks and problems associated with these digital cash. So, you’d come up with efficient strategies on dealing with them.

Biggest Problems and Dangers in Cryptocurrencies you must know

  1. Volatility

This is probably the most notorious risk that have caused the downfall of many business and investors. Cryptocurrencies, especially Bitcoin, easily change their value in drastic ways. It can rise or drop in a short span of time, which is something you can’t observe with traditional currencies. No matter how well you calculate such value, there’s a good chance you’d be disappointed at the end.

But what is the root cause of volatility problem in cryptocurrencies?

Let’s take bitcoin as example since it’s the most popular and the pioneering cryptocurrency available today. First, understand that bitcoin has no real value, since it only carry perceived value from trust of people. If BTC looks good, then its value increases—and so with the opposite as well.

So, for example, a massive bad news have hit the BTC world such as the MtGox infiltration in 2013. People would think twice in investing or trading BTC because of it. Bring some good news and they’d race to trade or invest—raising the BTC value. Not mentioning that there’s only 21 million BTC that could be mined, and there are already about 18 million mined bitcoins in the third quarter of 2019.

Now, let’s go back to the basic. High demand and low supply would surely rocket up the price. Pull the demand down and value would decrease.

  1. Human Error

Let’s face it. Humans aren’t perfect and anybody can commit simple mistakes. But talking about cryptos, simple mistakes can lead to big disasters and losses. That’s true especially if you plan to invest or trade big with these digital coins.

One of the most common mistakes that investors or traders commit is miscalculation. And this notoriously lead to serious headache when you miscalculate cost basis value. Cost basis is the initial value of cryptos when you got them. Miscalculating it means failing to accurately record the cost basis of new assets you’d acquire from subsequent trading.

You don’t wish to deal with unexpected tax amount because of failing to accurately keep tab of cost basis as well.

Other mistakes include failures of accurately encoding Google Sheets or Excel formula. Merely missing one character can lead to huge accounting loss. Simple mislabeling or skipping to label each transaction leads to tedious sorting out tasks as well. And on individual cases, many people loss significant amount because of errors in typing their BTC wallet account keys.

  1. Security

Cryptocurrencies are digital assets. That said, they’re also prone to digital threats such as hacking. Moreover, there are concerns of counterfeiting cryptocurrencies or using them more than twice. After all, they’re digital data which is supposedly easy to copy.

Such issues are solved by the Blockchain. The Blockchain is a platform of records which is inevitable and can be viewed by the public. If you use BTC to buy an item, for example, the transaction will reflect on the Blockchain records. And you or the seller can’t change such transaction entries.

Thing is, hackers are creative.

With Mt. Gox as a prime example, it’s easy to prove that cryptocurrencies can be stolen. But hackers don’t simply target the blockchain or create fake cryptos.  Instead, they often target wallet account keys.

In another incident, for example, hackers have stolen around 24,000 BTC from BitFloor last 2012. That’s by getting hold of the company’s wallet key stored in an online backup.

Now, let’s say you’ve safely kept your keys in an offline storage. You must be weary of inside job schemes as well. Some companies actually sustained big losses because of their own employees and acquaintances.

  1. Legalities

Many political jurisdictions still think twice in accepting the use of cryptocurrency—let alone making it a legal alternative currency. That’s primarily because of cryptos being a popular tools for criminal transactions.

One notable feature of most cryptocurrencies is anonymity. It hides the identity of the people involved in a transaction. When you look at the Blockchain, for example, you won’t see any names of people transacting using cryptos.

Hence, criminals use it as a leverage to buy or sell items or services without being traced. Some even use it for money laundering schemes, since the source would remain anonymous.

Another concern of many governments is the decentralized nature of cryptocurrencies, and their effects to the economy. For example, being decentralized means the government would have no control over such currency circulating in the market. Hence, some government entities are seeking the help of banking institutions to manage cryptos.

And bank takeover is another associated risks. It would ruin the decentralized nature of cryptos, since banks would manage the flow of these digital coins in the market. And that would inevitably put pressure on the value of cryptocurrencies.

  1. Lack of Acceptance in Commerce

Tie all the four risks above, and you’d get this major problem in using cryptocurrencies. Many business don’t accept cryptos as a mode of payment because of its risky nature.

If a seller accepts BTC from a buyer, for example, it must be according to the dollar price of an item, service or property. Problem arise when volatility hits, and the value of BTC on the hands of the seller drastically drops.

Many business are weary of handling BTC because of its highly complex and technical nature as well. They also fear hacking incidents, since such criminal activities are common on the digital world. Not mentioning that legal disputes and regulations appear as more headaches in handling cryptos too.

In short, many business can’t feel the assurance cryptocurrencies can bring. Hence, if you’d observe, cryptos only flourish in its own investment and trading market. Yes, some stores accept these digital coins, but it’s hard to find them near you. And there’s no sign of cryptos being accepted by majority of enterprises in the near future yet.

So, should you Think of Trading or Investing Cryptocurrencies?

Of course, you must consider such idea! Those big risks are surely scary. But you can avoid or deal with them accordingly with the proper strategy and techniques. What’s important is, you already know the biggest problems to face through such venture. Just note to be careful, and do enough research to succeed.

Carrie

Carrie

Carrie Ragsdale is a blessing, as her fellow writers say. She is a wonderful writer and her articles are something everybody loves. She mostly writes about nature and food.