Cryptocurrencies have risen in popularity and value over the past decade or so. Investment sectors find the digital asset appealing, and it’s widely considered an alternative to traditional commodities such as stocks and bonds.
NerdWallet says that crypto coins have become so popular that the 18 to 24 demographic prefer investing in Bitcoin, Ripple or Ethereum compared to saving up for personal pension or entering the workforce environment. However, a significant percentage have defaulted to cryptocurrency mainly due to misconceptions surrounding pensions. Specifically, 26% of young adults feel that a pension is too risky compared to cryptocurrency.
Before investing into cryptocurrency though, it’s best to understand the risks surrounding them.
It’s Highly Volatile
Those who’ve handled cryptocurrencies before are well aware of how volatile the commodity can be. The trade market of crypto is so volatile that it’s constantly fluctuating- for instance, between the months of July and October 2021 the price of Bitcoin has swung from approximately £22,000 to £48,000.
This level of volatility makes it very hard to predict where the value of cryptocurrency is going, as well as its long-term performance.
People can argue that the same can be said of any typical asset. However, what makes cryptocurrency so unique is its massive scalability and how it can change quickly and in the blink of an eye. One infamous example is of Tesla owner and billionaire Elon Musk’s tweets about the subject and its subsequent fluctuation.
Cryptocurrency investments are so volatile that any rumor or news can affect its value in a significant manner.
Storage is the Owner’s Responsibility
Unlike traditional investment vehicles such as stocks, in the world of cryptocurrency the investor carries the responsibility of storing his or her assets.
This means that when you purchase cryptocurrency such as Bitcoin, you’ll be the one responsible for storing it and keeping it safe.
Typically, cryptocurrencies can be stored in what’s called a �crypto wallet’ as they’re intangible and made up of data. The owner can choose to encrypt the wallet via a �private key’ so that only he or she can access or move the asset around.
The problem with private keys is that they’re so long that it becomes difficult to memorize them. To counter this, experts recommend setting up what’s called a �seed phrase’, or a string of words you can use to retrieve the funds and gain access to your digital wallet. It’s like having a security question you can fall back to in case you forget your private key.
Keep in mind that the seed phrase is your last line of defense in securing your crypto assets. If ever you forget your private key and can’t remember your seed phrase, you can kiss your Bitcoin or Ethereum goodbye.
Unfortunately there’s no other way to recover your cryptocurrency once you’re past the seed phrase stage. Fortunes are quickly lost and go into oblivion the moment investors somehow lose their private key or accidentally format or erase their crypto wallets.
It’s Susceptible to Hacks and Breaches
If that’s not enough, you can lose your hard-earned cryptocurrency via security breaches and hacking.
In one example, Poly Network, a popular Blockchain site became the target of malicious hacking and subsequently lost £433 million, or roughly $600 million in crypto assets. This happened recently in August 2021.
Certain types of crypto wallets only exist on the internet and are thus vulnerable to hacks and cyber attacks.
Digital wallets are software that take the form of a desktop or mobile app; these �hot wallets’ are considered more convenient as users can easily transfer their crypto funds to where they want it to go, but they’re more vulnerable since they exist and store Bitcoin online.
Even when they’re heavily encrypted there’s a likelihood that these wallets could be �stolen’ by cyber thieves. Once it’s done it will prove to be difficult, if not impossible to retrieve your investment.
You can choose, however, to put your cryptocurrency in a more secure type of wallet, which is known as a �cold wallet’. They’re similar to offline storage devices and do not require an internet connection to work.
You can choose to get a paper wallet or a hardware wallet to store your cryptocurrency offline. It’s recommended that you use a combination of both hot and cold so you won’t lose all your investments in the event of a hack or security breach.