Is Crypto A Safe Investment Option?

Investing in cryptocurrency is risky due to its volatility, lack of regulation, and vulnerability to scams and cyberattacks. Cryptocurrency exchanges are susceptible to security breaches, which have led to sizable losses for investors. The lack of government intervention and insurance means that investors are not protected if their assets are lost. Additionally, the complex and decentralised nature of blockchain technology, on which cryptocurrencies are built, makes it difficult to hold entities accountable in the event of fraud or theft.

However, the increasing adoption of cryptocurrencies by companies and individuals suggests a maturing industry and potentially safer investments.

Volatility and unpredictability

Supply and Demand

The price of Bitcoin, like that of most commodities, assets, investments, or other products, is heavily influenced by supply and demand. Bitcoin's market value is determined by the number of coins in circulation and how much people are willing to pay for them. Bitcoin is limited to 21 million coins by design, and as the circulating supply approaches this limit, prices are expected to climb.

Investor Actions

Bitcoin's volatility is also influenced, to some extent, by its investors. It is unclear how Bitcoin whales—investors with large enough holdings to influence market value—would liquidate their positions without affecting Bitcoin's price. If whales were to suddenly start selling their Bitcoin holdings, prices would plummet as other investors panicked.

Fear and Greed

Fear and greed are two primary drivers of Bitcoin's volatility and prices. Investors fear missing out on big upswings or falling victim to large downswings, leading them to panic buy or sell, impacting demand and prices.

Media Hype

Media outlets, influencers, industry moguls, and cryptocurrency fans create investor concerns with their opinions and predictions, leading to price fluctuations.

Regulatory Actions

Rumours about regulations can also impact Bitcoin's price in the short term. For example, China's government and central bank announced in 2021 that all cryptocurrency transactions were illegal, causing prices to drop.

Lack of regulation

Investing in cryptocurrencies is risky due to the potential for high losses from security breaches. Cryptocurrency exchanges are vulnerable to hacking and other criminal activity. The lack of regulation in the cryptocurrency market poses a significant risk to investors. While some see the lack of government intervention as an attractive feature of cryptocurrencies, it also means that investors are not protected if they lose their money.

The unregulated nature of the cryptocurrency market makes it susceptible to fraud and cyberattacks. Cryptocurrency owners have already been targeted for thefts worth billions of dollars. The newness of the crypto realm also makes it vulnerable to Ponzi schemes and other scams. The lack of regulatory oversight means that there is no guarantee that a cryptocurrency company will succeed, and investors could lose everything.

The lack of regulation also makes it difficult to determine the true value of cryptocurrencies. The prices of cryptocurrencies are based purely on speculation and hype, making it challenging to make informed investment decisions. This volatility can lead to significant losses for investors as prices fluctuate wildly.

The unregulated nature of the cryptocurrency market has also raised concerns about its potential impact on the broader financial system. The widespread adoption of digital assets poses risks to financial stability if the market continues to grow without better oversight and enforcement. There are also concerns about the lack of consumer protections in the cryptocurrency market, with regulators highlighting the need for stronger financial regulation and supervision.

The lack of regulation in the cryptocurrency market poses a significant risk to investors, and it is essential to consider these risks carefully before deciding to invest in cryptocurrencies.

Susceptibility to scams and fraud

Scammers often impersonate well-known companies or individuals, or pose as a romantic interest to gain the trust of their victims. They may also guarantee high investment returns or promise low-risk investments, which should be a red flag for investors.

Scams can take many forms, including fraudulent trading platforms, phishing attempts, blackmail, and fake job opportunities. Scammers may also impersonate government agencies or well-known companies, such as BlackRock, Boeing, or Amazon, to trick individuals into sending them cryptocurrency.

It is important for investors to be vigilant and cautious when investing in cryptocurrencies. They should research the company or individual they are dealing with and be wary of any promises of guaranteed returns or low-risk investments.

Security and the risk of theft

The security of cryptocurrency is a complex issue. On the one hand, the decentralised nature of blockchain technology makes it nearly impossible to counterfeit or double-spend. However, the technical complexity of using and storing crypto assets can be a significant hazard, especially for new users.

User Risk

Cryptocurrency transactions cannot be reversed or cancelled once they have been sent, so simple errors such as entering the wrong address can result in permanent loss. It is estimated that about one-fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses.

Regulatory Risk

The regulatory status of cryptocurrencies is still evolving, and governments could seek to regulate them as securities, currencies, or both. A sudden regulatory change could make it difficult to sell cryptocurrencies and could cause a market-wide price drop.

Counterparty Risk

Many investors and merchants rely on third-party exchanges or custodians to store their cryptocurrency. If one of these third parties is affected by theft or loss, it could result in the loss of the investor's entire investment.

Management Risk

Due to the lack of coherent regulations, there are few protections against deceptive or unethical management practices. Many investors have lost large sums due to management teams failing to deliver a product or otherwise acting in bad faith.

Programming Risk

Many investment and lending platforms use automated smart contracts to control the movement of user deposits. If there is a bug or exploit in these programs, investors could lose their investment.

Market Manipulation

Market manipulation is a substantial problem in cryptocurrency. Influential people, organisations, and exchanges can act unethically and sway the market, causing investors to lose money.

Cybercrime

Cryptocurrency exchanges and wallets are common targets for hackers. Many high-profile hacks have resulted in the loss of millions of dollars in coins.

In addition to direct theft, there is also the risk of "cryptojacking", where a website hijacks a user's resources to mine cryptocurrency.

Scams

Scams are a significant risk in the cryptocurrency space. Common scams include Ponzi schemes, exit scams, and fraudulent initial coin offerings (ICOs). Scammers often use celebrity endorsements and social media to promote their projects and create a sense of FOMO ("fear of missing out").

Volatility

The price of cryptocurrencies can be extremely volatile, and investors could lose money if they are forced to sell during a market downturn.

Practical Steps to Improve Security

Given the risks outlined above, it is important for investors to take steps to protect their investments. Some practical steps to improve security include:

• Using a secure wallet, such as a hardware wallet, to store your crypto assets
• Enabling two-factor authentication on exchanges and wallets
• Being cautious of unsolicited offers and investment opportunities that seem too good to be true
• Diversifying your investments across multiple assets and exchanges
• Keeping up to date with the latest security practices and recommendations

Long-term viability

The long-term viability of cryptocurrencies like Bitcoin is a highly debated topic. Some believe that as Bitcoin gains popularity, governments will be incentivised to destroy, outlaw, or heavily regulate it out of existence, as it poses a threat to their monopoly over monetary policy and retail banking. This is evidenced by China and eight other countries banning all cryptocurrency trades.

However, others argue that a ban on Bitcoin is nearly impossible to enforce due to its decentralised and borderless nature. Additionally, governments may be hesitant to ban it for fear of their enemies or rivals adopting it. For example, if the US banned Bitcoin, China might quickly embrace it.

The increasing adoption of cryptocurrencies by companies and individuals suggests a maturing industry and safer investments. Financial giants like Block and PayPal are making it easier to buy and sell cryptocurrency on their platforms. Tesla held almost $2 billion of Bitcoin in early 2022, and MicroStrategy has been accumulating Bitcoin since 2020, holding $13.5 billion worth of the cryptocurrency as of September 2024.

While the future of cryptocurrencies is uncertain, it is clear that they have already had a significant impact on the global financial system and will likely continue to do so in the coming years.

Frequently asked questions