Risks of Cryptocurrencies
In the past few years, cryptocurrencies are going viral and making their place in the world’s financial industry. Bitcoin, the most well-known cryptocurrency, has seen its value increase from around $1,000 in January 2017 to over $19,000 by December 2017. The same amount of increase in value has seemed in other cryptocurrencies too. While the potential for investment gain is high, there are also many risks associated with cryptocurrencies. This article will outline some of the major risks to cryptocurrency investors and suggest ways to overcome those risks.
What is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is decentralized, meaning they are not under the control of the government or any other financial institution. Bitcoin, the first and the most successful cryptocurrency, was created in the year 2009 as a peer-to-peer electronic cash system. Transactions are verified by network nodes through cryptography and recorded in a publicly distributed ledger known as the blockchain.
What are the Legal Risks to Cryptocurrency Investors?
The legal risks to cryptocurrency investors have changed over time as the cryptocurrency market has developed. In the early days of cryptocurrency, there were few legal risks as the market was unregulated. However, as cryptocurrency has become more popular, various governments have begun to regulate the market. This has led to an increase in the legal risks associated with cryptocurrency. However, now there are a number of legal risks faced by cryptocurrency investors.
Several types of fraud
One major risk is the possibility of fraud. With no centralized authority overseeing transactions, it is difficult to track and prosecute fraudsters. Fraudsters have used cryptocurrencies to commit a variety of frauds, including Ponzi schemes, fake initial coin offerings, and phishing attacks.
Ponzi schemes
These schemes are fraudulent investment schemes in which investors are promised high returns but are actually paid with money from new investors. One of the most well-known cryptocurrency Ponzi schemes is Bitconnect, which was shut down by the UK Financial Conduct Authority in January 2018.
ICO
Fake initial coin offerings (ICOs) are another type of cryptocurrency fraud. In an Initial coin offering, a company expands funds by selling digital tokens to investors. However, many ICOs have turned out to be scams, with the companies behind them disappearing with the money.
Phishing Attacks
Phishing attacks are another common type of fraud in the cryptocurrency world. In a phishing attack, a fraudster sends an email or text message purporting to be from a legitimate cryptocurrency exchange or wallet service. The message includes a link that, when clicked, takes the victim to a fake website that looks identical to the real website. The victim is then tricked into entering their login credentials, which allows the fraudster to gain access to their account and steal their funds.
Money Laundering
Cryptocurrencies have also been used to launder money. Money laundering is the process of moving money that has been obtained through illegal activity into legitimate channels. This can be done by using Bitcoin ATMs or cryptocurrency mixing services. Bitcoin ATMs are machines that allow users to buy Bitcoin with cash. They are often located in convenience stores or other public places. Criminals have used Bitcoin ATMs to launder money by depositing cash into the machine and then withdrawing it as Bitcoin.
Cryptocurrency mixing services
On the other hand, Cryptocurrency mixing services are websites that allow users to mix and blend their coins with other users. This makes it difficult to trace the coins back to their original owner. Money launderers have used these services to mix their dirty coins with clean ones. This allows the security to not recognize the difference between the black and the white collar crypto.
Tax Risks to Cryptocurrency Investors
Cryptocurrency investors are also subject to tax risks. One major tax risk is the possibility of capital gains tax. When an investor sells a cryptocurrency for more than the price they bought it for, they are subject to capital gains tax. Tax risk is the possibility of value-added tax (VAT). When an investor buys a cryptocurrency, they are subject to VAT. This tax is typically around 20%, meaning investors could lose a significant portion of their investment to taxes.
Market volatility
One of the biggest risks associated with cryptocurrencies is their volatility. The prices of cryptocurrencies can fluctuate wildly, making them a risky investment. For example, the price of Bitcoin fell from a high of nearly $20,000 in December 2017 to around $6,000 in February 2018. In other words, either you would earn a large amount which will make your life as sweet as you dreamed of. On the other side, cryptocurrency can also ruin your finances as badly as possible if they started falling down. However, investors should always be prepared for their upcoming outcome.
Other Risks to Cryptocurrency Investors
There is a number of other risks to cryptocurrency investors. One major risk is the possibility of price manipulation. Due to the lack of regulation, cryptocurrency prices are susceptible to manipulation. For example, in December 2017, there was a report that a group of traders manipulated the price of Bitcoin by using a bot to buy and sell the cryptocurrency on an exchange. This caused the price of Bitcoin to increase by $600 in a matter of minutes.
Network Forks
A network fork is a change to the underlying protocol of a cryptocurrency that can result in two different versions of the cryptocurrency. Forks can occur when developers cannot agree on a change to the protocol, or when a group of developers decides to fork the currency to create a new currency.
When a fork occurs, investors can lose money if they do not hold the correct version of the cryptocurrency. For example, in August 2017, Bitcoin underwent a hard fork, resulting in the creation of a new cryptocurrency, Bitcoin Cash. Bitcoin holders at the time of the fork were given an equal amount of Bitcoin Cash. However, the value of Bitcoin Cash was not equal to the value of Bitcoin at the time of the fork, and investors who did not hold Bitcoin Cash lost money.
Regulatory Risks to Cryptocurrency Investors
As mentioned earlier, one of the main regulatory risks facing cryptocurrency investors is the possibility of a crackdown by governmental authorities. While cryptocurrencies are currently not subject to many regulations, this could change in the future. If governments decide to crack down on cryptocurrencies, investors could lose a significant amount of money.
Another regulatory risk is the possibility of new regulations. For example, in September 2017, the Chinese government imposed new regulations on cryptocurrency exchanges, causing the value of Bitcoin to drop by over $1,000.6 New regulations could have a similar effect on the value of cryptocurrencies.
Investors also face the risk of exchanges being shut down. In January 2018, the South Korean government announced that it was considering shutting down cryptocurrency exchanges. This caused the value of Bitcoin to drop by over 10%.8. The key regulatory risks associated with cryptocurrency are its anonymity and its Lack of regulatory oversight. Because cryptocurrency is not legal tender, it is not regulated by a central bank. Bitcoin is also anonymous, meaning that transactions are not linked to individuals but to addresses. This anonymity makes it difficult for governments to track and tax Bitcoin transactions. And because cryptocurrency is not backed by a government or a central bank, there is no regulatory oversight. This Lack of regulatory oversight means that cryptocurrency is subject to volatility and risk.
In the past, regulators have taken a hands-off approach to cryptocurrency. Because, until recently, cryptocurrency was not a significant enough asset class to warrant regulation. However, as cryptocurrency has grown in popularity and value, regulators have begun to take notice. The current regulatory landscape for cryptocurrency is unclear. Various countries have taken dissimilar approaches to rules and regulations. And, because cryptocurrency is a global phenomenon, it is difficult for any one country to impose regulations.
Regulatory Challenges
The challenges for regulators when it comes to cryptocurrency are threefold. First, because cryptocurrency is a global phenomenon, it is difficult for any one country to regulate it. Second, cryptocurrency is a new asset class, and regulators are still trying to figure out how to approach it. And third, because of the anonymity of cryptocurrency, it is difficult to track and tax Bitcoin transactions.
The future of cryptocurrency is uncertain. It is possible that cryptocurrency will become more regulated as it grows in popularity and value. However, it is also possible that cryptocurrency will remain largely unregulated. Only time will tell.
How Can Investors Protect Themselves from Legal Risks?
There are a number of ways investors can protect themselves from legal risks. One way is to only invest in respected exchanges and wallets. Respected exchanges and wallets will have security measures in place to protect against theft and fraud. Additionally, investors should diversify their investments across different exchanges and wallets. This way, if one exchange or wallet is hacked, the investor’s other investments will not be affected.
Another way to protect against legal risks is to only invest what you can afford to lose. Cryptocurrencies are a high-risk investment, and there is always the possibility of losing all of your money. Therefore, only invest an amount that you are comfortable losing.
How Can Investors Protect Themselves from Regulatory Risks?
There are a number of ways investors can protect themselves from regulatory risks. One way is to invest in cryptocurrencies that are not based in one country. This way, if one country cracks down on cryptocurrencies, the investor’s other investments will not be affected.
Another way to protect against regulatory risks is to diversify your investments across different exchanges. So, if one exchange is shut down, this will not impact the investor’s other investments.
How Can Investors Protect Themselves from Tax Risks?
Investors can protect themselves from tax risks by taking the step to invest in cryptocurrencies that are not based in their home country. If your home country imposes taxes on cryptocurrencies, your investments will not be affected.
Another way to protect against tax risks is to invest in cryptocurrencies that are not easily converted into cash. It will help in if you are subject to capital gains tax, you will not be able to convert your cryptocurrency into cash easily and will not be subject to taxes on the sale.
How Can Investors Protect Themselves from Other Risks?
There are a number of ways investors can protect themselves from other risks. One way is to invest in well-known and established cryptocurrencies. These cryptocurrencies are less likely to suffer from price manipulation and network forks.
Another way to protect against other risks is to diversify your investments. In simple words, if one of your investments suffers from price manipulation or a network fork, your other assets will not be affected
Wrapping Up
Cryptocurrencies can be a highly risky investment, but they also carry the potential for high prizes. Before involving in cryptocurrencies, it is necessary to understand the risks and their basics. This article has outlined some of the major risks to cryptocurrency investors and suggested ways to mitigate those risks. Investors should keep the risks in front of them before investing in cryptocurrencies.
