Investing in cryptocurrencies – three basic risks and ways to protect yourself against them

riziko

If you are thinking of investing in cryptocurrencies, it is important to know what the risks of this investment are and how to avoid them, so that you don’t lose.

1. Regulations

The basic risk that threatens even the dominant Bitcoin, are regulations. First of all, cryptocurrency is competition for state currencies controlled by central banks. All major monetary systems, from the Fed through the ECB, to the Chinese government, are considering regulations or are beginning to regulate cryptocurrencies. An example of how administrative restrictions affected the price of cryptocurrencies was China.

The chart shows the development of the Bitcoin price after the Chinese government has banned any cryptocurrency advertising on social media.

btc cina

Source: www.tradingview.com

Profits from this investment are not taxed, which is an additional attraction for investors. However, this is another factor that could lead governments to regulate cryptocurrencies.

How to protect yourself against the risk of regulatory impact: There are several options, but the safest option is to choose a cryptocurrency registered by a company registered in one of the EU countries, where legislative and regulatory problems have been resolved.

2. Competition

The second main threat to cryptocurrency value is another cryptocurrency. Bitcoin dominates, and its algorithm guarantees that it will have only a finite amount, which should increase its value in the long term. But if an even more attractive currency appears on the market, Bitcoin, not confirmed by any material value, can become an empty shell. Other cryptocurrencies already know the story and have fallen to zero.

How to protect yourself against the risk of competition: Here you should emphasize the importance of choosing the right cryptocurrency. It is necessary to choose one that has a competitive advantage elsewhere than in the relative “novelty” of this financial instrument. Ideally one that also has added value in other areas.

 3. Price volatility and associated speculation and fraud

The concept of high earnings is supported by extreme volatility in the cryptocurrency market. The market is open 24 hours a day, 7 days a week, and the price of cryptocurrencies is constantly changing. For example, the price of Bitcoin reached $ 20,000 on December 17, 2017, and just seven days later it fell to $ 14,626, or more than a quarter.

Fluctuations are caused not only by “real” speculation about decline or increase. Fake exchanges are also factors that, as Bitcoin increases in value, act as credible, but later at the peak of prices, cancel the trading site and investors’ money disappears.

The reason for the success of fake ads is mainly the skills of attackers. Although the Facebook giant has taken a quick step to reduce blockchain and cryptocurrency advertising, scammers have found a new way to promote these ads.

Scammers are now moving away from using robots to impersonating crypto-celebrities and placing a large number of advertising links. A new trend is to create a way to verify profiles and hide them by celebrities such as Elon Musk, entrepreneur Petr Kellner or former football player Pavel Nedvěd.

Many politicians and government accounts, as well as giants such as Google and Target, have also been the victims of fraud. It is interesting whether Facebook can solve the problem more effectively than Twitter. They are currently deleting and banning fake accounts, but there are so many that they cannot assess many of them as fake.

How to protect yourself against high volatility and fraud: Some volatility should be considered, because cryptocurrencies generally show greater volatility due to less money than traditional financial markets. However, there are financial products that will help reduce the impact of market volatility. And if you devote enough time to research the company behind the chosen cryptocurrency, and preferably, if your deposit is insured with a reputable insurance company, you will be more sure that you will not lose your funds. We will discuss this in more detail in one of the other articles.

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