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What Are the Risks of Cryptocurrencies?

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Cryptocurrencies are digital or virtual currencies created on something called the blockchain, a public ledger that stores the information about cryptocurrency transactions between users around the world. This digital database, supported by a global network of computers called nodes, is the crucial technology that sets cryptocurrencies apart from traditional forms of money. 

It serves the purpose of keeping ownership records and transactional data. Security on the blockchain is ensured through cryptography. This practice involves the decoding and encrypting of data, and helps to prevent attacks from hackers, and incidences such as double-spending and 51% attacks from occurring. 

Cryptocurrencies do not have a physical form and are mostly decentralized — i.e. they are not issued by any central authorities. While Bitcoin was the first cryptocurrency ever created, some altcoins (cryptocurrencies that aren’t Bitcoin) launched over time include Ethereum’s Ether, Litecoin, Cardano’s ADA, Tether, and many others.

Some of the key features of cryptocurrencies include transparency, privacy, the lack of a centralized party to govern transactions, divisibility, and comparatively low fees. While all these aspects provide some ponderable advantages, they can result in some security concerns as well.

In this article, we will look at the use cases for cryptocurrencies, highlight some of the risks associated with them, and discuss possible ways to avoid them.

What Uses Do Cryptocurrencies Have?

Cryptocurrencies have multiple uses. These include money transfers, non-cash remittances, payments for goods and services, trading, investments, interest-earning, as a store of value, as rewards for content creators, online voting, and even crowdfunding. The number of industries that can and are benefiting from blockchain and cryptocurrency implementation is getting ever-bigger.

Let’s take a look at some of the most popular ways that cryptocurrencies are used in more depth. 

Trading

Cryptocurrency trading bears similarities to trading stocks or precious metals, but it has a much simpler entry point and is available to anyone with access to the internet (although some countries have restrictions). Unlike traditional stock markets that often have limited operating hours, trading cryptocurrencies gives the freedom to trade 24 hours a day, seven days a week.

Many investors choose this type of trading because they are attracted by the high volatility of cryptocurrencies, allowing them to potentially get much higher returns than traditional investments, especially if they use leverage. Cryptocurrency prices may fluctuate by more than 10% in a single day, or even more. 

Factors that can have a significant impact on the prices of cryptocurrencies include the following:

  • Market capitalization, i.e. the total value of all the coins in circulation.
  • The cryptocurrency’s coverage in the media. News and rumors about the development of projects related to the cryptocurrency may also influence its demand, and thus the price.
  • The level of integration into e-commerce payment systems. A higher level of integration will mean more users. 
  • Related real-world events such as regulatory updates or security breaches.

Because of this volatility, cryptocurrency trading is often considered to be riskier than stock trading, so as the old saying goes: Only trade what you can afford to lose. Trading with leverage should especially be approached with caution.

You can start trading by creating an account on a cryptocurrency exchange. Then you may add funds to your account via bank cards, wire transfers, or digital wallets. 

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Holding as a Store of Value

Many cryptocurrency enthusiasts prefer holding their coins in wallets with enhanced security for their funds’ long-term safety. Crypto wallets include information about public and private keys, which give users access to their cryptocurrencies.

The types of crypto wallets include:

  • Software (hot) wallets that are connected to the internet and give quick access to your funds.
  • Hardware (cold) wallets that offer the best security as they allow the storing of assets on a physical device offline.
  • Paper wallets can also be used for long-term storage. A paper wallet represents a piece of paper with two QR codes, one for receiving cryptocurrency and the other for spending it. 

A key advantage of holding funds in cryptocurrencies is that no central authority or government can gain access to your private information and funds, so their accounts cannot be frozen like can be the case with bank accounts. The users themselves are in control of their crypto wallets and funds.

Holders of cryptocurrencies can earn interest on their holdings like regular money. The most popular ways include DeFi lending, crypto staking, and crypto yield farming

Buying items

Apart from investment options, cryptocurrencies can also be exchanged for goods and services. Around the world, more and more merchants are accepting Bitcoin and other cryptocurrencies for the goods and services they provide.

Instant transactions and low fees are among the benefits that cryptocurrency users can enjoy. Some online retailers have already integrated cryptocurrencies into their operations and accept them as another means of payment. Among them are the following famous brands: Overstock, Microsoft, Virgin Galactic, Expedia, a popular travel booking company, NewEgg, a place for new tech gadgets, CheapAir, a travel agent company, and many others. 

The acceptance of cryptocurrencies as a form of payment is also growing thanks to the news that well-established payment processing systems (such as Paypal and Shopify) that are now supporting Bitcoin and other cryptocurrencies in one form or another. 

Money Transfers

Another popular use case for cryptocurrencies is sending and receiving funds, which can be especially important in countries around the world where not many people may have access to bank accounts and bank cards. Low fees and high transaction speeds make them an ideal payment solution for international money transfers. Cryptocurrencies allow users to send non-cash remittances from anywhere in the world to people who need to make cashless transfers such as mobile top-ups or utility bill payments.

Cryptocurrencies are transferred directly between the participants of the transaction with the transaction’s information being recorded on the blockchain.

As we’ve seen, cryptocurrencies can be used for many purposes, making many aspects of everyday life easier and more convenient.

But now, let’s look at some risks of cryptocurrency, and how they can be prevented.

Risks of Crypto When Investing and Trading

Profitable cryptocurrency trading requires a lot of time, experience, and technical skills to perfect. To avoid losing money, traders must make sensible choices and be aware of the possible risks.

Volatility

In cryptocurrency markets, the price of practically any asset can skyrocket and drop in just a few days or even hours. In such circumstances, even seasoned traders can suffer significant losses.

How to mitigate the risk: Only trade what you can afford to lose, and set stop-loss orders to reduce the possibility of loss. 

Investing In Just One Cryptocurrency

If a cryptocurrency is rocketing, it may seem like a good idea to put all of your money in it. However, if it loses value, you may go on to regret that decision.  

How to mitigate the risk: Diversification is key whether you trade cryptos or hold them long-term. That way, you can reduce the risk. 

Exchange Hacks

Although security has significantly improved generally in the industry over the years (with increasingly sophisticated security measures being implemented), there have nevertheless been instances of exchanges being hacked in the history of crypto. A notable example is the infamous Mt. Gox hack of 2014, which at the time was the world’s biggest Bitcoin exchange. Hackers stole around $460 million worth of Bitcoin.

How to mitigate the risk:

It’s worth investigating the reputation of an exchange and the security measures it implements to protect users’ funds before you entrust your money to it. Also, only keep on the exchange funds you intend to trade with. If you do keep your funds on exchanges, be sure to enable two-factor authentication (2FA).

Software Hacks

The private key is the most important thing giving you access to your funds. If you have a cold wallet, and your computer or smartphone where you store your crypto gets attacked, a hacker may get access to your private key, restore your wallet together with all the funds somewhere else, and steal your crypto. Although this is an unlikely scenario, due to the cost involved to launch such an attack, it’s not impossible. 

How to mitigate the risk:

Install up to date anti-hacking software on your device.

Private Key Loss

If you lose your private key or your device where you store cryptocurrencies crashes, your assets may be at risk. Be sure to take the necessary precautions.

How to mitigate the risk:

To avoid such a scenario, create backup copies of the private key beforehand and keep them in a safe place. 

Risks Of Crypto When Buying Items

Despite more and more merchants accepting cryptocurrencies as payment methods around the world, cryptocurrency adoption still has some way to go due to market volatility, regulatory concerns, and the (still) nascent stage of cryptocurrencies and blockchain technology development.

For merchants, the most crucial factor is the stability of their accepting currency, so that they could determine a fair price for their products. Unexpected price jumps and drops can lead to overpayment or underpayment, which leads to unpredictable profits and losses.

How to mitigate the risk:

There’s no getting away from the fact that Bitcoin and cryptocurrencies are still prone to volatility. But hopefully with their wider adoption, they will be less so over time.

Risks Of Crypto When Transferring Money

One of the common risks when transferring money is that of theft, using phishing websites or malware that replaces the recipient’s wallet address in the clipboard with another one. Another potential issue is losses caused by errors  in the address. 

How to mitigate the risk:

Always double-check the address you are sending to, the amount being sent, and the fee size before you confirm a transaction. Don’t follow untrusted links and always use a reliable antivirus program on your computer.

The Bottom Line

The list of risks associated with trading cryptocurrencies, investing in them, or using them for daily purchases may scare off inexperienced users. However, as long as necessary precautions are taken, there’s nothing to be scared of. Indeed, the benefits that they can provide make cryptocurrencies a flexible and useful asset for people from all walks of life. 

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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