Cryptocurrency is a digital or virtual currency that uses cryptography for security which makes counterfeiting nearly impossible. One of the defining features of cryptocurrency is that there is no central authority that issues it. This prevents government manipulation or interference.
Although investing in cryptocurrencies can be useful, there are also some risks involved. Bill Schantz of Mid Atlantic Financial, LLC will now explain some of them.
Why You Should Be Careful When Investing in Cryptocurrencies
According to Bill Schantz, the price of Bitcoin and other cryptocurrencies can frequently change. These changes are often caused by news and speculation about a particular cryptocurrency. For example, when the Chinese government announced that it was cracking down on cryptocurrency exchanges, the price of Bitcoin dropped significantly.
This means that if you invest in cryptocurrencies, you should be prepared for them to lose some or all of their value.
Lack of Regulation
Cryptocurrencies are not currently regulated by any government or financial authority. This makes them more volatile and difficult to predict than other assets such as stocks or commodities.
There is also the risk that new regulations could be imposed on cryptocurrencies in the future, which could adversely affect their price.
Pump and Dump Schemes
Another risk of investing in cryptocurrencies, as per Bill Schantz, is that there is a possibility of being scammed. For example, there have been a number of so-called “pump and dump” schemes, where investors artificially inflate the price of a particular cryptocurrency by buying it in large quantities and then selling it once the price has increased. This can leave investors with worthless or greatly devalued assets.
Market adoption is another risk to consider when investing in cryptocurrencies. Cryptocurrencies are not currently widely accepted as a form of payment, and their use is mostly confined to the niche world of cryptocurrency enthusiasts.
This means that if you want to use your cryptocurrency to buy goods or services, you may have difficulty finding someone who is willing to accept it. This could limit the price of cryptocurrencies and make them less attractive as an investment.
Investing in cryptocurrencies also carries the risk of theft. For example, in 2014, Mt. Gox, a Bitcoin exchange in Japan, was hacked, and around 740,000 Bitcoins were stolen. This represented around 7% of all the Bitcoins in circulation at the time and caused the price of Bitcoin to drop by around 30%.
Another way that investors can lose money is through so-called “wallet” software. These wallets store your private keys (essentially your cryptocurrency passwords), and if they are lost or stolen, your currency can be gone forever.
There have also been a number of cases where people have lost large amounts of money after their exchanges have been hacked. So it’s important to choose a reputable exchange and keep your currency offline in a “cold” wallet for added security.
Investing in cryptocurrencies is a risky proposition, but it can also be a lucrative one. However, as Bill Schantz has mentioned, you should only invest if you are ready to lose all of your investment. Cryptocurrencies can be either extremely lucrative or unprofitable.