Investing in cryptocurrency has become increasingly popular over the past several years with many people choosing this method of investing over traditional ways. Because of this more and more money is going into various forms of cryptocurrency every day. But what are the risks involved?
Like other types of investing, certain risks come with investing in cryptocurrency that you should be aware of. Some of these risks are somewhat mild, while others can be much more devastating to your livelihood.
Knowing the various risks that are involved in investing in cryptocurrency can help save you quite a bit of time and money. Keep reading to learn more about the risks of investing in digital currencies.
Why do People Invest in Cryptocurrency?
For many people, investing in cryptocurrency allows them to try thinking outside the norm with their portfolios. This is because crypto is not regulated by the same organizations that other investments are.
Cryptocurrency is not regulated by the government which means that there are far fewer rules which are more attractive to many people. With traditional investing, there is more red tape to cross not to mention the restrictions that are placed on transactions and certain types of accounts.
Investing in crypto allows investors to diversify their portfolios beyond the traditional methods of purchasing stocks and bonds. Since digital assets are on the rise, this makes for a smart investment move for many people who are willing to face the risks.
Overall, when you think about investing in any type of asset there are certain risks that you should consider and crypto investments are no exception. If you choose to invest in digital assets, you should be aware of all of the risks below to help yourself to be better informed before you make a costly mistake.
What are the Major Risks of Investing in Cryptocurrency?
While most types of investments are risky, cryptocurrency is more risky than most because of political regulation as crypto is not backed by banks or government entities.
Keep in mind that before you invest in crypto, you should always do your due diligence so that you are aware of the risks and what could happen if something goes wrong. This means that you should do your research but also talk to financial advisors and other experts in the field.
Being familiar with the specific risks can help you prepare as you begin your journey into the world of cryptocurrency investing. Read on below to learn more about the most common risks of investing in crypto.
You Could Lose Your Entire Investment
While losing money is not exclusive to crypto investing, there is a higher risk of losing all of your money with no way of getting it back. This is because digital currency is not backed by the FDIC or other banking institutions.
This means that if you make the wrong investment choices, you take the risk of losing all of the money you put into it. Keep in mind that if you choose to invest in cryptocurrency there is no government body you can go to for help if something goes wrong.
In many cases, depending on what type of crypto you choose to invest in, you can spend quite a bit of money to reach a certain level of investment. This means that you oftentimes have to put up quite a large amount of money to get a stake in the area you choose. Should things go south, you could potentially lose everything you put in.
Do note that the government is currently working to regulate cryptocurrency, meaning this risk could decrease in the future. But because of the decentralized nature of cryptocurrency, it will never be as safe as an FDIC investment.
Accidentally Investing in a Scam
Another risk of investing in cryptocurrency is that not everyone on the other side of the investment is honest. This means that you could find yourself investing in something that is a scam.
Even though this can happen anywhere you invest, although it is less likely in government backed assets, you can fall victim to accidentally investing in a scam anytime you do not do your due diligence. The important thing to remember is that because crypto is done on the computer, it makes it difficult to know who is really on the other side when you invest.
We recommend researching every project you consider investing in for the purpose of lowering your exposure to this specific risk.
Start-ups and ground-floor investing are methods that many people enjoy because of the major rewards involved. While the risks are huge, the payoffs for these investments can be extremely profitable.
For many people, learning about new ways of investing and getting involved while the project is in its infancy can be exciting. Even though this is true, you run the risk of losing your investments since the project is in the initial stages.
Some products end up coming to a grim end after a brief period of success, like the TerraLuna project, and that's the cold hard truth of the investing world. Know this risk isn’t unique to cryptocurrency however, as you could lose all your money in a fiat startup investment as well. Minimize this risk by knowing the project you are investing in and asking for proof of market research before you invest.
Projects Can Change
In most cases, people invest in companies or projects that they believe in and that have a great chance of success. Because of this, investors typically put in the time to research to learn the ins and outs of the specific project.
In some cases, once investors have put in the work and have invested in the project, the details of the project can change. Minor changes along the way are typical and expected to make upgrades and improvements. However, when those upgrades change the entire core of what the project was supposed to be, it can be devastating.
For example, those who have invested in Ethereum are now facing changes that will affect how they invest and how much they need to have to stay in the game. This change involves getting rid of the need for miners to validate transactions and relying on stakers instead.
Even though this change can be good in some aspects such as the saving on overall energy consumption, those who want to stake or back the system will have to put up 32 ETH, which, based on the current prices of ETH translates to quite a lot of money, effectively pricing out beginning investors. Unfortunately there is no way to foresee this particular risk and is something you will have to deal with as an investor in any market.
Final Thoughts About Risks of Investing in Cryptocurrency
The bottom line about the risks of investing in cryptocurrency is that any type of investment is risky and should be taken seriously. Cryptocurrency is no different in the realm of investing in something that has the potential to devastate you financially.
While there are many risks associated with investing in cryptocurrency, experts believe that there are just as many rewards. It is important to keep in mind that investing in anything, especially crypto, is a personal choice, and that you should talk it over with someone before making decisions you may regret.