Investing in cryptocurrencies without fully understanding the risks involved is an invitation to unpleasant surprises and potentially, loss of money.
In this post, I would be showing you everything that could go wrong with your crypto investment and what you can do about them to secure your money and mental health.
5 major risks of investing in crypto
Below are the major risks of investing in crypto that you must take note of
Let’s discuss each of these risks of investing in crypto in detail below.
1. Volatility risk
The first and inescapable risk of investing in crypto is volatility.
Volatility simply means the unexpected usually significant price fluctuations of crypto assets.
It’s not surprising to see the price of a crypto asset move up or down by -50% or 500% in a day. As such the $1000 you invested yesterday could be worth a lot less or more after a few hours.
The crypto market is this volatile because it’s relatively new, liquidity is still low, and everything runs on speculation as investors bet on prices going up or down.
How to manage volatility risk
There’s a popular saying in crypto, “when in doubt, zoom out.”
It means you should look at the bigger picture and have a long term focus instead of focusing on short term price movements. Because in the long run, prices only go up, if you’ve invested in the right projects.
So the best weapon against volatility is patience. Just wait it out and hope for the price to go up sooner.
However, nobody knows how long you have to wait to be in profit. It could be a few weeks, months, or even years.
But if you have invested in great projects with solid fundamentals, it would be worth the wait.
Another way to manage volatility risk is to invest only in the more established and top cryptocurrencies by market capitalization such as BTC, ETH, BNB, etc.
These are still extremely volatile compared to the traditional markets, but they’re more stable than the lesser-known, low market cap coins.
2. Risk of scam
According to a Chainalysis report, $14 billion worth of cryptocurrencies was lost to scams in 2021 alone, up from $7.8 billion in 2020.
3 things that make you highly vulnerable to scams are:
Scams that promise you huge and unreasonable returns and get-rich-quick opportunities appeal to your greed.
If you’re the greedy type, your focus would be mostly on the promised reward, ignoring the glaring scam that it is.
Scams that use fear against you are those that messages that “threaten” to close your account or whatever, except you click their phishing link.
If you click those links and do what they ask, any money in your wallet or account would be gone.
And others prey on your ignorance of crypto to mislead you into parting away with your money on scam projects.
YouTube shills and fake crypto exporters are among the most notable for this.
How to manage the risk of scams
First, don’t be controlled by greed or fear.
Nobody is here with a mission to make you rich overnight. Be wary of any project that promises to make you rich from doing nothing.
Secondly, don’t click unfamiliar links. Visit all websites directly or bookmark them for easy access.
Better still, right-click or hover your mouse over every hyperlink to view the link behind it and confirm that it’s the correct one before clicking them.
And lastly, try and educate yourself as much as possible and be aware that most celebrities and influencers make money from giving you bad advice.
So before you invest based on the advice of some crypto “experts” or influencers on YouTube or wherever, take your time to do your own research first.
It’s normal to be ignorant about some new technology and magic internet money thingy, but don’t let these fools fool you.
Finally, maintain good company by joining a community of like-minded crypto investors who have your best interest at heart.
3. Regulatory or legal risks
Crypto is currently unregulated in most countries or at best, under-regulated in some.
Countries and governments all over the world are still learning and trying to understand how best to regulate crypto.
That’s some good news as regulation will bring greater clarity and open more doors for institutional money and the masses to enter crypto.
However, these laws are being formulated while your money is already invested in the market. Talk about playing the game before the rules are declared.
The regulatory frameworks being created could end up favouring your investment or killing it, you have no idea which it’s going to be, and that’s a big risk we’re all taking.
The most important of these regulations to take seriously include tax laws, KYC requirements, and securities.
How to manage regulatory risk
Follow the discussions and development of legal frameworks for crypto in your country and especially in developed nations. And then begin to adjust your portfolio accordingly to stay on the safe side.
Don’t worry if your country hasn’t started developing any regulatory environment for crypto yet. Most countries are copycats of laws from developed nations.
By following the developments in other countries, you’ll be far ahead of the game and well prepared when your own country decides its time to regulate crypto.
And always remember that “ignorance of the law is not an excuse”. It’s your responsibility to keep yourself informed of what’s legally required of you and your crypto investment.
4. Risk of hacks and exploits
The exchange or other centralized platforms where your crypto is deposited can be hacked.
The DeFi smart contracts your wallet is connected to could also be hacked or a bug in the code could be exploited.
This risk can affect you in 3 major ways, depending on your involvement with the projects or coins involved.
- The funds could be totally or partially stolen from the hacked or exploited platform and smart contract. And the platform may not be able to reimburse you fully (if at all).
- The token of the hacked platform could drop significantly and if you’re invested in it, you will lose money.
- The coins stolen would usually be dumbed (sold) by the hackers and this would cause their price to crash and they may never recover. If you’re invested in these coins, you’ll lose a lot of money.
How to manage the risk of hacks and exploits
You can’t stop a platform from being hacked or exploited, but you can reduce your exposure to such possibilities by:
- Never leave your money on a centralized platform except you’re actively using it for trade or staking etc. And even then, ensure the platform has some form of insurance and a good security system.
- Avoid using unaudited smart contracts as much as possible or use a separate wallet whenever you have to connect to an unaudited contract. An audit does not necessarily mean that a smart contract cannot be hacked, but it eliminates a lot of bugs that could be exploited. Making it a lot safer than an unaudited smart contract.
- Never keep all your funds in a single wallet or platform, so that if one happens to get hacked, you will still have funds in others. The more wallets you maintain, the less likely you are to be wiped out with a single hack.
- Do not connect your wallet to phishing websites designed to steal money from any wallet that interacts with it. Always verify that you’re on the correct website.
To cut the long story short, always work with platforms and be cautious with what smart contracts you interact with and where you deposit your money.
5. Risk of business failure
Investing in crypto is very similar to buying the shares of a traditional company on the stock exchange.
In both cases, you’re betting that the business or company behind it would be successful in the long run.
But not every business would survive and thrive in the long run.
In fact, it’s a popular belief that 90% of all existing cryptocurrencies would die within 5 years.
And it could be one or more of the coins you have in your portfolio right now or the next one you’re going to buy.
How to manage the risk of business failure
It’s hard to tell which crypto will survive and thrive and which will die, but you can make educated guesses by evaluating every project’s fundamentals to estimate its chances of success.
Secondly, you have to constantly monitor and evaluate the progress and prospects of the projects you’re invested in and rebalance your portfolio accordingly.
Remember, portfolio management is one of the six (6) stages of cryptocurrency investment and it’s a never-ending process.
Investing in crypto is one of the boldest money moves you’ll ever make.
The market is not only extremely volatile, but it’s also highly unregulated. And there are just too many ways to lose your money with no hope of recovery.
From scams to ignorant and expensive mistakes, hacks, business failures, and regulatory risks, you have to be on top of your game at all times to survive in this crypto jungle.
In this post, we have discussed the various you can manage all these risks of investing in crypto.
Plus you can learn more and stay up to date on market developments by joining a good community of like-minded crypto investors.