Crypto risks are everywhere. Despite the blockchain industry maturing and some of the worldโs largest financial institutions pouring into the space, the crypto markets are still plagued by plenty of pitfalls waiting to ensnare wide-eyed newcomers.
Whether itโs a shady influencer pump-and-dump or the befuddling complexities of digital asset self-custody, the risks of cryptocurrency arenโt to be taken lightly.
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Fortunately, itโs not all doom and gloom. Most of the biggest risks in crypto are easily avoidable, and with a quick bit of prior research, youโll be well-equipped to handle whatever this supposedly high-risk asset class has to throw at you.
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Is Cryptocurrency Risky?
Thereโs no sugar-coating it: investing in crypto assets like Bitcoin (BTC) and Ethereum (ETH) carries greater risk than storing your wealth in traditional assets or fiat currencies. The price swings are far more volatile, blockchain technology can be tough to navigate, and even the most โtrustworthyโ crypto exchanges and brokerages are vulnerable to insolvency.
At the same time, the crypto space offers a range of financial services and freedom that traditional platforms cannot. Decentralized financial systems like smart contracts give greater flexibility and control to the individual, while cryptography-enforced self-custody arguably offers the best security available to digital currencies.
But before diving into the world of virtual currencies and crypto investment, you must be prepared for some of the biggest risks newcomers might face.
5 Biggest Risks for Crypto Beginners
From the fake Elon Musks that plague social media to the nefarious hackers that try to get their hands on your precious private keys, you need to be on the lookout for dozens of things in the crypto space.
1. Hacks and Scams
Crypto hacks and scams are perhaps one of the biggest issues facing the growth and acceptance of the blockchain industry. According to blockchain researchers De.Fi, the industry lost over $1.9B to hacks in 2023 alone, with only $200M recovered.
The crypto industry seems to suffer a devastating hack almost every week, with millions of dollars being siphoned out of crypto wallets or compromised DeFi protocols. On top of that, the anonymous nature of blockchain transactions can make tying the stolen funds to an identity difficult.
How to Mitigate Your Risk:
Fortunately, avoiding hacks and scams in crypto is far easier than people would have you believe. Keeping watertight cybersecurity practices and maintaining good digital hygiene will ensure that your crypto assets stay safe, regardless of what hackers might try.
Never share your private keys or seed phrases with anyone; avoid clicking suspicious links at all costs.
2. Price Volatility
It should come as no surprise, but trading cryptocurrencies is not for the faint of heart. Dramatic price swings are a part of cryptoโs DNA, and traders should know that theyโll likely face some significant downturns in the value of their portfolio at unexpected times.
While deterring institutional investors for years, crypto volatility is one of the main reasons that millions of people are attracted to the blockchain industry in the first place. However, surprisingly, many people seem to forget that Bitcoin’s price, and the price of other digital assets, go in both directions.
How to Mitigate Your Risk:
If youโre a risk-averse investor or trader, trading digital assets on cryptocurrency exchanges like Binance or Coinbase might not be you.
As a general rule of thumb, crypto assets with high liquidity and large market caps, like Bitcoin and Ethereum, generally handle market downturns better than smaller cryptocurrencies.
Whatโs more, stablecoins like USDT and USDC are pegged to the value of the US Dollar and are theoretically safe during a market collapse.
3. Regulatory Problems
The regulatory landscape surrounding the crypto space is almost as complex as blockchain technology itself. Every jurisdiction operates under its own rules, and what is legal in one country might be considered money laundering in another.
As such, the crypto history is plagued with dozens of complicated lawsuits and protracted legal battles. Token issuers, ICO service providers, and trading platforms must remain compliant with local governments while the rules around what crypto regulation looks like continue to be an unfinished topic of conversation.
How to Mitigate Your Risk?
Managing your risk in this department is tricky because the individual has little control over regulatory standards within their jurisdiction. To protect yourself, the best thing you can do is to stay informed on all aspects of crypto asset ownership and use in your country and not break any local laws.
4. Self Custody
Self-custody, or having complete control over your assets, is one of the foundational pillars of the entire cryptocurrency movement. Storing your digital assets in a crypto wallet completely inaccessible to anyone but you is why so many people initially invested in Bitcoin.
Unfortunately, Self-Custody comes with plenty of its own risks. Yes, you might be safe from a central bank or government freezing your funds, but are you safe from yourself? Crypto history is rife with stories of people losing hardware wallets or accidentally sharing their seed phrase online and losing everything.
Additionally, inputting an incorrect wallet address when completing a transfer is a surprisingly common way for newcomers to lose their crypto forever. Always verify your transactions before hitting send!
How to Mitigate Your Risk
Simply put, the best way to keep yourself safe when practicing Self-Custody is to educate yourself on all the risks and maintain consistent behavior.
Back up your seed phrase securely in the physical world and avoid storing any information regarding your crypto wallet on your computer, where it might be at risk from hackers.
Double-check all blockchain transactions before sending them and verify all addresses and amounts are correct. Finally, consider getting a hardware wallet to give crypto assets the best protection possible.
5. Blindly Following the Crowd
The exorbitant profits and dreadful losses common in the cryptocurrency market have made the industry sensationalized. Crypto influencers are everywhere on social media, shamelessly shilling their bags to try and pump the value of their portfolios.
Market manipulation is everywhere, and anytime you see someone sharing a bullish thesis for a particular coin or asset, chances are high that theyโre already a holder and are looking for exit liquidity.
How to Mitigate Your Risk
It sounds obvious, but the easiest way to avoid blindly following the crowd is to keep a clear head and always do your own research. Anytime you see an influencer pushing a certain coin, ask yourself what their motive might be.
On the Flipside
- Part of what makes the crypto space so exciting is testing and exploring new possibilities. Novel DeFi protocols and innovative new use cases for blockchain technology are inherently risky, and exposing yourself to the cutting edge of this industry means occasionally throwing caution to the winds and diving into the Wild West.
Why This Matters
The best way to stay safe in crypto is to educate yourself as thoroughly as possible. Learning about how financial markets and blockchain technology work will ensure youโre prepared for whatever the crypto industry throws your way.
FAQs
Yes, most financial regulators consider cryptocurrency and associated digital assets a high-risk asset class.
In terms of price volatility, the โsafestโ cryptocurrencies are stablecoins like USDT and USDC. These assets are pegged to the value of the US Dollar and theoretically shouldnโt deviate from this price. However, that doesnโt mean that theyโre completely risk-free.
Crypto risks include price volatility, hacks, scams, market manipulation, and the accidental loss of assets in self-custody. The best way to mitigate your risk to all of the above is to educate yourself thoroughly on how blockchain technology and financial markets operate and think objectively about the state of the industry at large.
