Crypto investing has taken the world by storm in recent years. With the promise of sky-high returns, it’s easy to see why people are drawn to the potential of investing in cryptocurrencies. However, it’s important to be aware that there are a few things to watch out for before diving in headfirst.
One of the biggest risks is the volatile nature of the market. This means that the value of your investment can fluctuate wildly, leaving you with a lot less than you had anticipated. Bitcoin, for example, saw its value rocket to almost $20,000 in December 2017, only to plunge to around $3,000 a year later. Ethereum had a similar experience, with its value dropping from $1,400 to around $85 over the same period. So, it’s important to be prepared for a bit of a bumpy ride.
Another potential danger is the risk of scams and fraud. Since cryptocurrencies are decentralized and largely unregulated, it’s easy for fraudsters to take advantage of unsuspecting investors. One example is the Centra Tech ICO, which raised $32 million and was later revealed to be a scam. Unfortunately, this is just one example of many that have occurred in the world of cryptocurrency. So, be vigilant and do your research before investing in any cryptocurrency.
There are also security concerns when it comes to crypto investing. Since cryptocurrencies are digital assets, they can be vulnerable to hacking and cybercrime. In 2018, Japanese exchange Coincheck was hacked, resulting in the loss of around $530 million worth of the cryptocurrency NEM. While many investors store their cryptocurrencies in offline “cold” wallets to reduce the risk, it’s still important to take steps to protect your investment.
Choosing a reputable exchange is essential to minimize the risk of hacking and fraud. The top five cryptocurrency exchanges by trading volume suffered a combined 31 security incidents in the first nine months of 2020, with losses totaling around $300 million. So, be sure to choose an exchange with a strong track record and a focus on security.
It’s also important to be aware of the hype that can surround certain cryptocurrencies. The Filecoin ICO raised $257 million, but the project has yet to launch and has been delayed multiple times. Be sure to do your own research and look into the technology behind a particular cryptocurrency, the team behind the project, and any regulatory issues that may be relevant. And don’t put all your eggs in one basket – diversification can help spread the risk.
Having a clear investment strategy is essential, too. It can help you avoid making impulsive decisions based on market movements or news headlines. For example, when the pandemic hit, the value of Bitcoin initially dropped sharply but then quickly rebounded, leading some investors to rush to invest in the cryptocurrency. But the value became more volatile as the pandemic continued, highlighting the importance of a long-term investment strategy.
Finally, it’s important to be aware of the tax implications of crypto investing. In the US, for example, cryptocurrencies are considered property and are subject to capital gains taxes. It’s a complex area, so be sure to consult with a tax professional to make sure you’re meeting your obligations.
In summary, while crypto investing can be an exciting and potentially lucrative opportunity, it’s important to proceed with caution. Be aware of the risks associated with the volatile market, potential scams and fraud, security concerns, and hype around certain cryptocurrencies. Choose a reputable exchange, diversify your portfolio, and have a clear investment strategy. And don’t forget to stay on top of the tax implications!