Any investment involves risk. Cryptocurrencies are no exception. Due to the digital nature, the risks are different. Let’s list them all.

Trading risk

Cryptocurrencies are often seen as a source of quick money. Many people come to crypto exchanges in the hope of becoming billionaires in the shortest possible time. Naturally, most of these would-be enthusiasts leave with nothing. And there are several explanations here.

First — newcomers to the crypto industry do not understand what exactly they are dealing with. Some investors and traders have heard that cryptocurrencies are very volatile. But for some reason they interpret this fact one-sidedly: that digital assets are constantly and strongly growing. But there is a flip side to the coin – cryptocurrency falls no less, and sometimes even faster, than it grows. Naturally, people who find themselves at a big disadvantage cannot stand it, close their positions and are left with nothing.

Second moment – incorrect use of trading leverage (making transactions using borrowed money). The meaning is the same as volatility: for some reason, newcomers prefer to think that any cryptocurrency will go in their direction (grow when long and fall when short). However, the reality turns out to be very cruel and in a matter of moments knocks out many financial adventurers from the market.

To avoid getting into a puddle when trading cryptocurrencies, study what you are investing in. It is advisable not just to visit the official website of the crypto asset, but to read the White Paper or at least some calculations from Github, understand tokenomics, and understand who is behind the project. It is advisable to make sure that the project has been around for some time and has a certain reputation. You should also develop your own cash management strategy, which will include a strict risk management system. You don’t want to hold everything in one asset; diversification is a better option.

Legal risk

How you can use cryptocurrencies depends on the jurisdiction in which you are located. Although the Internet works everywhere, digital assets are not allowed everywhere. In some places they are completely prohibited, as in China, in others partially (Canada, Nigeria), in others the status is not fully established (most countries, including Russia).

Even if you see that cryptocurrencies are used as a means of payment or, as they say in English, are a legal tender, this does not mean that they have been assigned the status of money. For example, in Japan you can pay with bitcoins, but only where they are accepted. The only currency used in the country is Japanese yen. Also keep in mind that the very concept of legal tender will differ from country to country – it is not something strictly defined once for the entire planet.

Legal restrictions may get you into trouble with the law. To protect yourself, familiarize yourself with the laws of the country where you intend to carry out transactions with cryptocurrencies in advance. You might even be so careful that you find loopholes to make a profit. If you are indifferent to the legislation, then be prepared that you will have to face the consequences – up to and including criminal liability. For example, in the United States, a case received serious publicity when an American citizen sent $10 million in bitcoins to a country from a sanctioned “black list.” For this, in the spring of 2022, charges were brought against him
criminal case.

Risk of hacker attack on the exchange

No matter where you trade cryptocurrencies, there are always risks that one or another exchange will be subject to attack by cybercriminals. The example of MtGox of 2014 will be before the eyes of Bitcoin investors for a long time. At that time, $460 million worth of cryptocurrency was stolen. In general, any modern exchange could be subject to a similar attack.

You will not be able to completely reduce this type of risk to zero. The only thing you can do is to use the services of proven platforms that have been working in the industry for a long time: Binance, Bybit, OKX and many others.

The risk of a hacker attack on your PC or smartphone

If you can access exchange data, then why can’t this be done with gadgets? You can download some software from the Internet, but it turns out to be a hacker’s development, with the help of which attackers will gain access to your cryptocurrency wallet, for example, as a result of a phishing attack.

You can try using hardware storage, such as Ledger. True, it can also be lost or broken, but it will protect you from hackers to a certain extent.

Risk of losing the private key

Losing a private key is a problem that has affected many early Bitcoin owners. Without it, they could not and cannot access their cryptocurrency. In general, the problem continues to this day. And your private keys can be stolen. If this happens, someone else will have access to the cryptocurrency, or rather information that belongs to you.

The only thing you can do here is to store your private keys in the most secure place possible. It’s also a good idea to have multiple copies in case one goes missing.

Risk of losing cryptocurrency during transfers

You can, under the guise of a regular wallet like MetaMask, download a similar application from criminals. When you log into your account and enter data, it will go to attackers, who can then use it in your real application. And sometimes you can simply enter the wrong address.

All that can be done against this is to use the official website and software. You can install an antivirus, but it will not be a panacea.

In general, investing in cryptocurrency and risk are two inseparable things. The best thing you can do to minimize it is to figure out that they are there and not make unnecessary movements. Regardless of your actions, cryptocurrency will be volatile, scammers will come up with new loopholes to steal your assets, authorities will throw a spanner in the works, and people will lose private keys.

This material and the information contained herein do not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.