Cryptocurrency is a legitimate vehicle to put your money in. However, it carries high risk and is speculative unless you can fully afford to lose that money and understand what you are putting your money into. It is hard to say anything at this point as hype of cryptocurrencies is real or virtual as the entire system is in its infancy stage. Let us analyze the risks involved in cryptocurrency by highlighting them.
Decentralized system: Crypto is decentralized, which sounds cool, but who’s going to fix the mess? No-one, because there isn’t a central authority that can handle it or stand accountable for. Let us take an example here: After the founder of Canada’s biggest cryptocurrency exchange, QuadrigaCX, died unexpectedly, about 115000 clients have been unable to retrieve $190 million in holdings, because the owner was the only one who knew the password to access them.
SYSTEMIC RISKS: In a systemic financial panic, almost every asset will see a decline value. In a lot of cases people are buying stocks, houses, businesses, and yes, crypto, on credit. This magnifies losses when things begin to go bad, and can force people into margin calls or pure panic selling. It is this cascade that distinguishes full blown financial panics from mere pullbacks.
EXTREME VOLTALITY: Cryptocurrency is extreme volatile compared to most financial assets. It makes oil and silver look tame by comparison. Any systemic financial crises are going to obliterate the value of most crypto currencies. I wouldn’t be surprised to see 95% losses to bit coin, and total collapse of some other minor currencies, with even just a 40 or 50% pullback in the stock market.
SCALABILITY: Probably the biggest concerns with cryptocurrency are the problems with scaling that are posed. While the no of digital coins and adoption is increasing rapidly, it is still dwarfed by the number of transactions that payment giants processed each day. Such an evolution is complex and difficult to do seamlessly.
CYBERSECURITY ISSUES: Crypto is subjected to cyber security breaches and may fall into hand of hackers. We have seen evidence of this, with multiple ICOs getting breached and costing investors. Mitigating this will require continuous upkeep of security infrastructure, but we are already seeing many players dealing with this directly, and using enhanced cyber security measures that go beyond those who used in the traditional banking industries.
REGULATIONS: This thing is not regulated. It’s under no control and supervision. Even if we perfect the technology and get rid of all the bugs, until the technology is adopted by federal governments and regulated, there will be increased risks in this digital currency.