Cryptocurrencies have attracted a reputation as unstable investments due to high investor losses as a result of scams, hacks, and bugs. Although the underlying cryptography is generally secure, the technical complexity of using and storing crypto assets can be a significant hazard to new users.
In addition to the market risks associated with speculative assets, cryptocurrency investors should be aware of the following risks:
In addition to the market risks associated with speculative assets, cryptocurrency investors should be aware of the following risks:
- User risk: Unlike traditional finance, there is no way to reverse or cancel a cryptocurrency transaction after it has already been sent. By some estimates, about one-fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses.11
- Regulatory risks: The regulatory status of some cryptocurrencies is still unclear, with many governments seeking to regulate them as securities, currencies, or both. A sudden regulatory crackdown could make it difficult to sell cryptocurrencies or cause a market-wide price drop.
- Counterparty risks: Many investors and merchants rely on exchanges or other custodians to store their cryptocurrency. Theft or loss by one of these third parties could result in losing one's entire investment.
- Management risks: Due to the lack of coherent regulations, there are few protections against deceptive or unethical management practices. Many investors have lost large sums to management teams that failed to deliver a product.
- Programming risks: Many investment and lending platforms use automated smart contracts to control the movement of user deposits. An investor using one of these platforms assumes the risk that a bug or exploit in these programs could cause them to lose their investment.
- Market Manipulation: Market manipulation remains a substantial problem in cryptocurrency, with influential people, organizations, and exchanges acting unethically.