Dramatic gains are possible, but so are devastating losses. Investors should pay attention to the wide-ranging risks of cryptocurrencies. Here’s an summary of cryptocurrency volatility risk, technological risks, regulatory uncertainty, and other issues that might affect the worth of your investment.
Price volatility
Cryptocurrency prices can fluctuate dramatically from week to week and even inside a single day. On May 19, 2021, for instance, Bitcoin price fell by 30%after the Chinese government cracked down on Bitcoin mining and trading.
Crypto prices also can rise and fall based on various aspects reminiscent of changing public sentiment, world news, general adoption, protocol upgrades, upcoming regulations, hacks, scams, and more. Also, crypto is a comparatively recent asset class and the market continues to be in the worth discovery process.
Technology risks
The blockchain technology underlying cryptocurrencies is provided with quite a few security measures, including decentralization, cryptography, and consensus mechanisms to substantiate the legitimacy of transactions. However, no blockchain is resistant to every threat.
Secure your crypto wallet Regular and secure backups protect you from computer failures, device theft, and your personal mistakes – like unintentionally uninstalling your digital crypto wallet. But it’s harder to guard yourself from threats like Software error, Data disruptions And 51% attacks (when a gaggle of crypto miners takes control of greater than half of a network’s computing power).
Crypto investors and developers are also concerned about progress in Quantum computingthe subsequent generation of computer technology. Its potential computing power could allow malicious actors to hack crypto wallets, falsify transactions, or rewrite parts of a blockchain to change transaction records. If that were to occur, crypto values would likely collapse – even worn outThat day might be several years away, but Ethereum and other crypto organizations are already working on post-quantum cryptography.
Low liquidity
Liquidity means how easily and quickly you may exchange an asset for money. Cryptocurrencies – especially smaller, newer ones – are inclined to be less liquid than other investments like stocks and bonds. This signifies that regardless that crypto markets around the globe are open almost 24/7, trading or redeeming your digital coins may not occur as quickly as you would like.
As a result, it’s possible you’ll experience “slippage” – a difference between the expected price and the worth you get after the trade is executed. Slippage can occur when the bid/ask spread – the gap between what buyers are willing to pay and what sellers are willing to simply accept – changes whilst you wait in your trade to execute, possibly even multiple times. If the actual price is lower than expected, your buying power increases; this known as “positive slippage.” If the actual price is higher than expected, your buying power decreases; this known as “negative slippage.”
