With 2022 being a rough year for Bitcoin and cryptocurrency in general, many may be looking elsewhere to invest their money.
However, those who have been tracking the crypto market for more than a few years are starting to see familiar patterns re-emerge, and there are increasing rumblings of the cycle repeating. If these people are correct, cryptocurrency may be repeating a cycle of all-time highs being followed by a sell-off and “crypto-winter” where prices and interest in cryptocurrency is relatively low. This is often followed by a rebound and new all-time highs being reached. So, if you’re thinking about investing in crypto, you may not be alone.
Any good investor worth their salt will tell you that before you jump into any investment, you should explore all the downsides and potential risks as well as the upsides. So, with that in mind, let’s take a look at some of the biggest issues you need to be aware of when investing in crypto.
The Lack of Regulation
Cryptocurrency is still a largely unregulated market, which can be both good and bad. On the one hand, it allows for more freedom and flexibility when it comes to investing. On the other hand, it also means that there are fewer protections in place if things go wrong. While the US government has begun to take steps to regulate the crypto market, it is still very much in its infancy. This lack of regulation also means that there are no rules or standards when it comes to things like disclosures, insider trading, and other potential issues. As an investor, you need to be aware of these risks and do your own due diligence before investing in any cryptocurrency.
Manipulation by whales
The term “whale” is used to describe a large holder of a particular cryptocurrency. These whales can often manipulate the market by selling or buying large amounts of a particular coin. This can often lead to price swings that can hurt smaller investors, while the whales take advantage of their pump and dump to reap profits. It’s debated if and how often this occurs, but it’s something to be aware of nonetheless.
Exchanges getting hacked
Another big issue in the crypto world exchanges getting hacked. This can lead to a loss of funds for investors, as well as a loss of confidence in the market. Some of the biggest hacks in recent years have been on exchanges like Mt. Gox, Bitfinex, and Coincheck. While these hacks are often newsworthy, they are also relatively rare. However, they do highlight the need for investors to be aware of the risks involved in storing their coins on an exchange. Many experts recommend only keeping the amount you need on an exchange to trade, and storing the rest in an offline “cold storage” wallet.
The Potential for Fraud
Another big issue with investing in cryptocurrency is the potential for fraud. This is especially true when it comes to initial coin offerings (ICOs). An ICO is when a company raises funds by selling crypto tokens to investors. These tokens can be used to access the company’s products or services, or they may just be a way for the company to raise money. Either way, there have been a number of cases where companies have raised millions of dollars through an ICO only to then disappear with the funds. As an investor, you need to be very careful when considering investing in any ICO. Make sure you do your research and only invest in projects that you believe have a solid chance of success.
The Volatile Nature of the Market
Cryptocurrencies are notoriously volatile, which can make them a risky investment. Prices can swing wildly up and down, and this volatility can be exacerbated by news events or even rumors. This makes it very important for investors to have a solid understanding of the market before investing any money. It’s also important to remember that cryptocurrencies are still a relatively new asset class, so they may be more volatile than other investments like stocks or bonds.
Complexity and lack of knowledge or understanding about Crypto Assets by the general public
The majority of people are still not familiar or comfortable with the concept of digital currencies which makes it difficult for them to invest in it. Many people still do not understand how these digital assets work and the potential benefits they offer. This lack of understanding can lead to a lot of people being hesitant to invest in crypto. While some may argue that this will change over time, or that the average investor doesn’t need to understand the technology behind crypto to invest, it is still an issue that needs to be considered.
Growing Toll on the Environment
The process of “mining” for cryptocurrencies requires a lot of energy. This is because the computers that are used to mine need to be constantly running, which uses a lot of electricity. This has led to some concerns about the environmental impact of crypto mining. While there are ways to offset the impact, it is still something that investors need to be aware of. Some estimates suggest that the daily energy expenditure of bitcoin is equal to the entire country of Ireland.
What Are The Best Ways To Mitigate The Risks And Invest In Cryptocurrency Safely?
Despite the risks involved in investing in cryptocurrency, there are still many people who are eager to get involved in the market. If you’re considering investing in crypto, there are a few ways you can mitigate the risks:
Do your research
This one is pretty obvious, but it’s worth repeating. Before investing in any cryptocurrency, make sure you do your research. This means reading up on the history of the project, the team behind it, and the community that supports it. It’s also important to understand the technology behind the project and what problem it is solving. The more you know about a project, the better equipped you will be to make an informed investment decision.
Diversify your portfolio
Don’t put all your eggs in one basket. When investing in crypto, it’s important to diversify your portfolio. This means investing in a variety of different projects. This will help to mitigate the risks associated with any one particular project.
Invest only what you can afford to lose
Cryptocurrencies are a risky investment, so it’s important to only invest what you can afford to lose. This way, if the market takes a turn for the worse, you won’t be left bankrupt.
Consider Cryptocurrency IRAs
If you’re looking for a way to invest in crypto without putting all your money at risk, you may want to consider investing in a cryptocurrency IRA or 401k. These are retirement accounts that allow you to invest in crypto without having to worry about taxes. They also insulate you from some of the volatility associated with the market.
These are just a few of the biggest issues to consider before investing in cryptocurrency. While the market is full of potential, it’s important to remember that there are still risks involved. By doing your research and investing only what you can afford to lose, you can help to mitigate some of these risks.