As you get prepared to begin investing in cryptocurrency, it is important that you have a clear understanding of the impending dangers. Knowing these dangers will give you an upper hand in developing strategies for overcoming them.
In this article, you will be taken through all existing cryptocurrency dangers. The idea is not to scare you away. Rather, it is intended on giving you proper guidance so that you can have a strong and safe footing the interesting world of cryptos. Read on to find out.
What dangers exist in cryptocurrency?
1. Liquidity and uninsured issues
Illiquidity is one of the biggest problems that faces cryptocurrencies in the modern world. Liquidity is an important consideration for any market. When there is no money, an imbalanced environment would be created, paving the way for things to quickly get out of hand.
This does not imply that asset prices are not supposed to fluctuate at all. These kinds of oscillations actually turn out to be beneficial in the long run in terms of great returns.
But then liquidity has its own set of problems on cryptocurrency. Ever since crypto trading started, this is a problem that has been compounding over the years. As the decentralized method of making payments gains momentum, more and more people have given it a try regarding the development of their own cryptocurrency exchanges.
It is no secret that not all exchanges have the same capabilities. Each comes with separate trading pairs, meaning the trading volume is bound to change.
Therefore, there are some exchanges that have higher liquidity than others.
To be on the safer side, develop the tendency of conducting a detailed, independent standing of an exchange’s liquidity before using it. Pay keen attention to reports as well as user feedback. Such reviews come in handy in helping you not make grave mistakes.
2. Pump and dump
Cryptocurrency market manipulation is one incident that has always been heavily debated. Although not yet proven, it is argued out that high-level insider trading, collusion, and market manipulation can be executed here. One major reason why it is argued so is that coins often shoot up or decline in prices within a few days, if not hours.
The occurrence in which prices all of a sudden go extremely up and then revert to the previous day’s figure is referred to as a pump and dump scheme.
It can easily exploit your fear of being left out before losing you significant money.
During a pump and dump incident, an asset that is just a few pennies worth is inflated in terms of the price through a well-orchestrated marketing scheme.
This can be done in a wide range of ways including misleading statements, false statements, co-signs, social media posts, or any other means that can be used to get a preferred message to the masses.
In order to ensure all the claims are well-supported, the worthless asset’s price is rapidly increased until it reaches the set pump. After investors are told of the asset and they see the price going up, more begin to buy into the stock.
At this point, participants of the pump and dump scheme begin selling or dumping the overvalued cryptos. These individuals make money by selling the assets at more than double the amount they bought it at. As they go about selling the overvalued assets, the price starts to tank and corrects itself to a more accurate figure.
By the time you come to realize it, you will have lost a significant amount of money and literally have no way to recover it. Most of the time, small investors end up being ripped off their funds given that they are the ones incurring losses as organizers earn great profits.
Before you can buy into an investment, make sure that the price given is an accurate reflection of the true picture. What you want to do is to assess the authenticity of each piece of information released on the cryptocurrency.
If it is false, there is a big chance that this is part of a large scheme extort your hard-earned money. Do not just accept something for what it is said. Look beyond the information given to you and guarantee that you have the right signals.
When the world was introduced to cryptocurrencies and blockchains, these were hailed as unbreakable. There was literally no hacker on earth who could penetrate through the blockchains and execute their malicious intents. Today, more and more holes are emerging in the cryptocurrencies, many of which have been used to stage major attacks.
There are some popular exchange platforms that have been attacked. In some cases, a sizeable of a network’s computing power has been taken control of and used to clear transaction history.
When that happens, the same cryptocurrency could end up being spent more than once, something referred to as double-spending. When that happens, the attacker can easily make away with millions of dollars or even initiate inflation.
As of 2017, more than $2 billion cryptocurrencies had been stolen as a result of malicious hacks. Most of these attacks take place on exchanges. There could be a chance that much more has been stolen given that the $2 billion is just what has been made public.
It is possible to defeat the hackers, but only if you take proactive security measures. The very first step is never to login to your exchange while connected to public Wi-Fi. These are breeding grounds for hackers who will use the slightest of all chances to get into your account and do whatever they want.
In addition, make sure that you use more complex passwords for your wallets.
This is in addition to choosing a wallet that has top-notch security features.
Perform a keen evaluation of all wallets and only go for those that you are sure will be able to seamlessly safeguard your money.
4. Human error
One thing that you already know about cryptocurrencies is that they are intangible. Your ability to use the coins relies heavily on accessing your crypto wallet, which is normally secured with some type of password.
When you forget this password, your money will be gone for good! The risks of being locked out, facing geophysical risks, or losing hardware are abundant.
Some may want to note down their passwords somewhere for remembrance purposes. However, this also comes with its own set of risks including falling into unauthorized hands. Thus, your only option is to memorize.
In the event that you are a group that jointly own cryptos, the bank’s equivalent of a joint account, and only one person knows the password, a sudden unfortunate occurrence to the password holder may see all of you lose your money.
5. Technological risks
Bitcoin is one of the leading crypto assets and one which requires high-level mining for you to own some BTC. The problem with Bitcoin mining is that with each successful mining, the computational complexity involved increases and requires more energy.
There is fear that it will reach a stage where it will be almost impossible to execute a successful bitcoin mining, even with the existence of machines built specifically for BTC mining.
We all agree with the idea of decentralizing blockchain structures makes them more secure as opposed to financial institutions that maintain a centralized and private ledger. However, not all tokens or cryptocurrencies have the same module of operation.
This makes it necessary for investors to be wary of any false promises made by decentralized systems since not all blockchains have the same capabilities.
In conclusion, the emergence of cryptocurrencies could be one of the best things to have happened to global transactions. However, we must also understand that there are risks involved, just like any other innovation. When we know the kind of risks we are facing, we are empowered to better tackle them.
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