Crypto Investment: Understanding Risk Your Tolerance
There has been a surge in crypto investments in recent years, with over 18.5 million bitcoins currently circulating. The extraordinary shift from traditional investments to digital asset investment is primarily attributed to cryptos’ numerous advantages, including security, anonymity, more comfortable cross-border transfers, and adaptability.
Cryptocurrency investment is one of the non-conventional forms of assets that will still see increased adoption in the coming years. The uniqueness associated with these non-traditional forms of investments has resorted to numerous risks. Maneuvering through the treacherous waters requires a clear understanding of what you may be coming your way. This article aims to shed more light on a few types of problems you might encounter during your crypto investment and how to deal with them.
Risks of Digital Investment
Investing in cryptocurrency is a relatively new phenomenon that is associated with different risks, including:
Changes in the manner in which a market operates usually affects all sectors of the economy. Since the inception of bitcoin, the primary Cryptocurrency in 2009, the crypto market is experiencing drastic changes in its value every day.
The price per unit changes is simultaneous to the forces of demand and supply at play in the market. The non-existence of government control in the industry further catapults the differences in prices. These are the two primary factors that bring about drastic shifts in the value per unit of the digital coins over a short period; hence, resulting in massive profits or losses for their holders.
The higher level of market volatility existing in cryptocurrency makes it a riskier venture than its counterparts in traditional investment forms.
Lack of Recognition as a Legal Tender
Cryptocurrency is a digital currency meaning it cannot be held or owned wholly by a specific nation. Thus, no federal banks of a country in the world have put in place strategic policies governing its use, recognizing it as a legal tender or protecting its users.
The lack of recognition of cryptocurrency as a legal tender increases the risk of holding it as it can be rendered worthless at any moment. Thus, an investor cannot depend on it primarily as a secure source of investment.
Even though most of the cryptos readily available are under encryption, there has been a significant increase in cryptocurrency thefts via hacking.
Advancement in technology has resulted in creating superior computers and software that enable hackers to gain unauthorized entry to crypto platforms, including exchanges. Over $ 1.7 billion worth of cryptocurrencies have been stolen from crypto exchanges in 2020 alone, confirming that crypto platforms are not entirely safe.
An increase in the number of crypto-jacking taking place will negatively affect the specific cryptocurrency value once the information is made public. Thus, the negative changes in the amount of cryptocurrency make the entire investment risky.
Lack of Mainstream Adoption
A limited number of units is usually in circulation to maintain or appreciate the value of a particular type of cryptocurrency. Imposing such a limitation means that only the value of the digital currency can either appreciate or depreciate.
The limitation creates a form of restriction which will prevent the digital currency from gaining global recognition as a legal tender. Thus, investors can only hold a limited number of units of the cryptocurrencies.
Association with Illegal Activities
The digital currency is sometimes used as a form of payment to procure illegal substances or services. Services that may be procured include money laundering services or different account credentials. Most of these transactions usually take place on the dark web, thereby bringing disrepute to digital assets.
Such information may deter individuals with honest intent from purchasing the digital currency, thereby affecting the money’s overall value.
Techniques to Protect Cryptocurrency Investment
Before investing in cryptocurrency, one needs to adopt the several precautions to protect themselves. Some of them include:
Conduct Extensive Research on Cryptocurrency
After successfully creating the bitcoin using the blockchain tech, many cryptos are developing up to date using the same method. However, different cryptocurrencies have different values that depend on numerous factors. Before deciding on the type of crypto to invest in, an investor should conduct extensive research on it to get an in-depth understanding.
The data collected during the research will provide the guidelines on the most suitable coin to purchase. Some of the critical information which needs to be identified include the following: The price per unit changes over a specified period, the number of traded volumes of each cryptocurrency, and the currency’s level of popularity, whitepapers, etc.
Invest in a Cold Wallet
Purchasing a cold wallet may be an expensive undertaking, as most hot wallets are usually free. However, cold wallets provide more protection as they allow cryptocurrency holders with an opportunity to access their wallets offline.
The cold wallet is more secure as it does not require one to use the internet to access his/her wallet. This protects a cryptocurrency holder from crypto hackers who rely on the internet to steal credentials.
Change Passwords Regularly
Changing your password regularly will improve the security levels of your wallet from unauthorized individuals. Furthermore, it will provide enhanced security as the encryption codes will vary with each new passcode.
Use a Secure Internet Connection
When accessing your hot wallet or trading using public WiFi, it exposes your device’s information to numerous individuals. When using public WiFi or home WiFi without a VPN exposes your devices’ IP address. The IP address will make it easier for hackers to obtain all your personal information.
Have Multiple Wallets
Procuring multiple wallets will help to spread the risk of holding your assets instead of using one wallet. Different wallets will require you to provide other login information, which will be encrypted using different codes. Thus, if one wallet has been hacked, you will only lose the funds held in it instead of the entire amount invested.
Like any other financial investment, the crypto investment carries significant risks. The main risks involved in crypto investments include technology risk, price volatility, theft, and changing regulations. The several risks involved in crypto investment calls for investors to exercise caution while conducting crypto investments.
Besides, inexperienced crypto investors should only invest amounts they are willing to lose. Nonetheless, despite the risk involved in crypto investment, crypto investors can still reap the most benefit from the venture by incorporating the techniques identified above plus exercise patience.