- What are Risks for Investors?
- Traditional Risks vs. Investment Risks
- Some Other Risks
The recent price surges in cryptocurrencies have appealed to many investors as a potential investment opportunity. While there may be many stories associated with crypto trading, it is also important for investors to understand the risks associated with it.
Various experts and risk managers all over the world are analyzing the risks involved with cryptocurrency trading and the things that should be kept in mind before investing. An investor should be fully aware of the usefulness of conducting transactions, sources that can lead to change in the value of crypto assets, and all the weaknesses of crypto infrastructure.
Having this knowledge will help crypto investors properly assess their potential gains and losses.
What are Risks for Investors?
Risks involved with cryptocurrencies can differ for different stakeholders in the crypto market, including financial and non-financial institutions and investors. For an investor the biggest risk is the investment risk, meaning the risk associated with the loss of value for a cryptocurrency. Since there is no fundamental value associated with cryptocurrencies, their value could drop to zero at any given time.
Many investors have predicted it to be a positive probability, that cryptocurrencies, especially Bitcoin, will replace national money for transactions. However, the only hindrance to this is that cryptocurrencies are more expensive means of conducting business than national currencies, given the total cost borne by both parties involved in a transaction.
If the cost of transactions for cryptocurrencies does not reduce considerably, all the claims about cryptocurrency replacing national money will lose credibility. For countries having a well-functioning monetary and financial system, the value of cryptocurrency could become much weaker.
Traditional Risks vs. Investment Risks
For an investor, investing in cryptocurrency, a loss will occur when the value of cryptocurrency will fall. This can be considered as a normal investment risk, but the newness of cryptocurrency makes risk assessment extremely difficult, in comparison to conventional assets.
Even the returns, from the investment, are difficult to assess, making it difficult to evaluate the risk-return tradeoff. Past performances of the cryptocurrency cannot be considered because of its tangibility feature.
Some Other Risks
It is very difficult to claim ownership of cryptocurrency in court, so in the event of theft, an owner will have no resources to claim it. Also, an investor cannot do anything legally, if the transactions processed are not executed to the terms to which they initially agreed upon.
Lack of availability of proper information about cryptocurrencies has also complicated the task of investments. As most of the time, the transaction volume between parties is reported overstated.
Apart from these common risks, there also are some particular risks that are associated with cryptocurrency, such as the risk of continuous existence, which is less known. Also, an investor should be aware of the factors that will impact his investment, a strategy should be implemented based on these factors.
Disclaimer: The article should not be considered as any financial advice. It is advisable to conduct thorough research before investing.\
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