Cryptocurrency is an encrypted digital currency that isn’t tied to a bank or government. It lets people and companies transact directly, peer-to-peer, without the need for mediators like banks. Popular Cryptocurrencies include:
- Bitcoin (BTC)
- Ethereum (ETH)
- Litecoin (LTC)
The cryptocurrency was invented in 2009, and it has become popular over time as its value has grown significantly. More than 1,000 cryptocurrencies now exist on the market. This new form of money attracts many people because they think it’s easy to earn money through investments in cryptocurrency.
In addition, they are more exciting than traditional currencies since no central authority controls them as governments do with fiat currencies like dollars or euros. However, despite all these potential benefits of cryptocurrencies, there are some dark sides to cryptocurrency.
Investing in Cryptocurrencies
You can invest in cryptocurrencies by buying the coins or tokens directly through an exchange, such as Coinbase and Kraken. You can also purchase them at a cryptocurrency ATM using cash or debit cards. To do so, you need to download a wallet first on your phone or desktop computer; this is where you will store your private keys (a key pair consisting of a public key and its corresponding private key) that allow you to access your funds and make transactions.
There are risks associated with cryptocurrency investments. For example, if someone steals your wallet and gets access to its private keys, they could transfer all of your funds out of it without needing any additional information from you. In addition, there have been cases where hackers have hacked into users’ wallets and stolen their money before their owners could even notice that anything had happened!
You must choose the right type of wallet before investing in cryptocurrencies because there are different types available: hot wallets vs. cold wallets vs. paper wallets etc.
However, investing in popular and older cryptos like BTC and ETH can have lesser risks when compared to buying newer cryptocurrencies like DOT, SOL, etc. But with proper research, you can avoid these risks. So be prepared and learn about SOL or other cryptos you want to buy. Ask questions like how to buy SOL and is it profitable over Bitcoin or Ethereum, what is SOL and how to trade it, how to buy Solana from different crypto exchanges, etc.
Moving forward, let’s discuss some common risks associated with cryptocurrencies:
The Constant Fluctuation of the Price of Cryptocurrencies.
Cryptocurrencies are volatile investments. It means that the price can rise or fall dramatically over short periods, which you should be aware of before investing. For example, let’s say you buy 1 Bitcoin for $1,000 on January 1st, 2019. By February 7th, 2019, the price has risen to $1,300 per coin:
That’s an increase of 30% (known as a “gain”). But if you tried selling your bitcoins immediately after purchasing them and ended up repurchasing them because they fell in price during your sale period. Well, then, suddenly, those gains have turned into losses! It is challenging to predict what will happen with cryptocurrency prices over time. This unpredictability makes it hard to plan when making decisions about where and when to invest in cryptocurrencies themselves.
Risk of Cyber Attack and the Vulnerability of Personal Wallets.
The risk of cyberattacks is real, and it’s the most common problem faced by crypto investors. As you may have heard, in 2018, a hacker stole $41 million from CoinRail, an exchange in South Korea. It is one of the biggest hacks so far.
The best way to protect yourself against these attacks is by keeping your digital assets offline and away from the internet. You should also invest only what you can afford to lose. Store your digital assets on multiple devices or hardware wallets for extra safety. If you are unfortunate enough to become a victim of cybercrime, report it immediately so that authorities can take appropriate action quickly before any damage is done.
Digital Currencies are Not Insured by Any Government.
Even though cryptocurrencies have been around for several years, they are still not insured by any government or private organization. A bank or insurer cannot cover your cryptocurrency investments if you lose them.
In addition to being uninsured, cryptocurrencies do not have any tangible asset that backs them up. Either currency is backed by gold or another physical commodity like silver and copper coins. However, cryptocurrencies are only backed by the faith of investors who use them as units of exchange and stores of value within their economy.
Bitcoin is an example of digital currency: it is used as a medium for exchange. Still, it does not possess any backing from any government or institution like gold does (or used to). Instead, bitcoins are earned through mining activities that involve solving complex mathematical problems; this process also involves using high-powered computers that consume large amounts of energy and electricity while solving these mathematical puzzles.
Lack of Liquidity
The lack of liquidity is a significant concern for investors. It means that you cannot sell your cryptocurrency holdings on time. A good example of this is when the price of Bitcoin crashed from a high of about $20,000 to below $6,000 in just five months. In such a situation, investors who wanted to sell their cryptocurrency holdings had to wait for other investors to buy them out at a lower cost and lose money.
Another implication is that lack of liquidity creates volatility because fewer traders are willing or able to buy or sell at any given time. Lack of liquidity also leads people outside the country’s borders to buy more stocks – leading them into exchange rate volatility, thus increasing riskiness associated with investments.
Tax Implications on Cryptocurrency Investments.
Although you may be able to buy, sell and trade cryptocurrencies without paying any tax if you’re operating within the law, that’s not always the case.
Cryptocurrency mining can have tax implications.
When it comes to mining cryptocurrency, profits are often taxable. If a miner mines one or more coins by using computing power (and not buying them from an exchange), they need to include those revenues as income when filing their taxes for the year. They will deduct any associated costs (such as electricity usage) from their gross earnings before calculating their net profit. They’ll also want to figure out which coins were mined during each month so they can report them appropriately on Schedule C of their tax return.
Cryptocurrencies are a Risky Investment, and You Need to be Prepared for it.
Cryptocurrencies are highly volatile assets, and there is no central authority to appeal to if you lose money.
If you invest in cryptocurrency, you should be prepared for the possibility that your investment could decrease in value or even become worthless.
Any government or private organization does not insure cryptocurrency investments. Therefore, you will not be eligible for compensation from a regulatory body if something goes wrong with your cryptocurrency holdings.
As of now, there is no central authority overseeing any cryptocurrency investments made on exchanges or other similar platforms. If something goes wrong at the exchange level—or worse yet, with one specific exchange—there’s no way to appeal the decision made by whoever’s running it at that time.
