Dramatic gains are possible, but so are devastating losses, and investors need to understand the broad risks associated with crypto. Here’s an overview of crypto volatility risk, technology risks, regulatory uncertainty and other issues that can affect the value of your investment.
Cryptocurrency prices can fluctuate wildly from week to week, or even within a single day. For example, on May 19, 2021, the price of bitcoin fell by 30% after the Chinese government cracked down on bitcoin mining and trading.
Crypto prices can also rise and fall based on various factors such as changing public sentiment, world news, mainstream adoption, protocol upgrades, pending regulations, hacks, scams, and more. Moreover, crypto is still a relatively new asset class and the market is still discovering prices.
The underlying blockchain technology of Cryptocurrencies is built with numerous security measures including decentralization, cryptography and consensus mechanisms to confirm that transactions are legitimate. However, no blockchain is immune to every threat.
By regularly backing up your crypto wallet and storing it securely, you are better protected against computer failure, device theft, and your own mistakes, such as accidentally deleting your crypto digital wallet. But it’s harder to defend against threats like software bugs, data failures, and 51% attacks (when a group of cryptominers takes over half of a network’s computing power).
Crypto investors and developers are also concerned about advances in quantum computing, the next generation of computing technology. Its potential computing power could allow attackers to hack into crypto wallets, falsify transactions, or rewrite parts of a blockchain to alter transaction records. If that were to happen, crypto values would likely plummet — even be wiped out. That day is probably still several years away, but Ethereum and other crypto organizations are already working on post-quantum cryptography.
Liquidity means how easily and quickly you can exchange an asset for cash. Cryptocurrencies – especially smaller, newer ones – tend to be less liquid than other investments such as stocks and bonds. That means trading or cashing out your digital coins may not be as fast as you’d like, even though crypto markets around the world operate almost around the clock.
As a result, you may get “slippage” – a difference between the price you expect and the price you get once the trade is executed. Slippage can occur if the bid and ask spread — the gap between what buyers are willing to pay and what sellers are willing to accept — changes as you wait for your trade to fill, perhaps several times. When the actual price is lower than expected, your purchasing power increases; this is called “positive slippage”. When the actual price is higher than expected, your purchasing power decreases; this is called “negative slippage”.
This post What are the risks of trading crypto?
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