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Cryptocurrencies are a new form of digital money created, transferred, and stored electronically. While not accepted by mainstream investors—at first—cryptocurrency is now viewed by many as a smart investing strategy, especially for those who want to incorporate more diversification into their portfolios. They are decentralized currencies that are not regulated by any federal government or central bank.
Cryptocurrencies, such as Bitcoin and Ethereum, use distributed ledger technology to manage transactions in the currency, making it possible for you to store your cryptocurrency in a digital wallet on your computer or smartphone.
You can buy cryptocurrency from an online crypto exchange. Modern exchanges let you buy crypto with a credit card and convert cryptocurrency (into fiat currencies).
Many investors view cryptocurrencies as an alternative way to invest their money with the possibility of earning high returns. While they can be risky, cryptocurrencies offer some promising investment opportunities compared to stocks and bonds.
If you’ve been skeptical about using crypto as an investment asset, we’ve got you covered. In this blog, we’ll discuss a few risks associated with cryptocurrencies and tips to mitigate those risks. Let’s dive right in.
Cryptocurrency Is Highly Volatile
While most people know that cryptocurrency is highly volatile, what does that actually mean? “Volatility” refers to the day-to-day fluctuations in price. You could buy some Bitcoin today, and tomorrow it could rise or fall by 20% or more.
The volatility of cryptocurrencies like Bitcoin, Ethereum, and others is due to several factors. One significant reason is that the market for crypto is very thin in comparison to other asset classes.
Another reason for crypto’s volatility is because of its nature as a truly borderless asset class with buyers and sellers from many different countries around the world. Also, the absence of a centralized regulatory body makes crypto markets prone to unexpected ups and downs.
If you’re planning to invest in cryptocurrency, make sure you study the markets carefully and choose established coins.
There’s a Chance It Could Be Outlawed
Bitcoin and other cryptocurrencies are not recognized by many governments, some of which may decide to take action against them.
Cryptocurrency is increasingly being used for illegal activities, such as money laundering. As a result, governments may outlaw them all together to regain control of their national financial systems.
Furthermore, the European Union is considering having cryptocurrency exchanges register with the government. If that happens, it will make it more difficult for investors to buy cryptocurrencies because they’ll need to be verified by official agencies.
The Market Is Unregulated
When investing in cryptocurrency, it’s essential to be aware that the unregulated nature of the market can give rise to some unfortunate scenarios. If you fall prey to a scam or bad actors who try to undermine the value of your investment, you might have no recourse.
Unfortunately, even if you’re complying with your government’s laws, you could still be trading in a grey area. There are many countries that haven’t implemented cryptocurrency regulations yet.
Some countries even ban cryptocurrency outright. In some places, it’s perfectly legal—but because the market is so new and untested from a regulatory standpoint, there are certain risks involved in trading cryptocurrencies.
Your Coins Could Be Stolen
Investing in cryptocurrency can be a fun and easy way to make money. However, there are also risks involved. Cryptocurrency is stored in your wallet, which is protected by your private key. Think of it as a password you choose that’s connected to the address of your wallet.
It’s essential to remember (or write down) your private key because if you lose it, forget it, or die without telling anyone what it is, all those sweet coins are gone forever.
Another thing you have to worry about is someone else getting access to your private key, whether through the internet (hacking), social engineering (tricking you into giving up information), or more nefarious means (stealing your computer).
There are many scams out there designed to target people looking for a quick way to buy cryptocurrency on the cheap. Always read reviews and do research before you purchase cryptocurrency and convert it into fiat currencies. Also, it’s a good idea to store your coins in a hardware wallet.
You Could Incur a Capital Gains Tax
You may incur a capital gains tax if you decide to invest in crypto. It is a type of income tax that applies to any asset held for less than a year (or, in certain countries, more than a year). Capital gains taxes are calculated based on the profit made at the time of sale.
Many investors find it to be one of the most daunting parts of investing. And while it’s true that the world of cryptocurrency can be confusing and stressful because it involves dealing with government bodies and financial institutions, there are some things you can do to minimize your stress or even avoid capital gains taxes altogether.
For example, if you know that you’re going to hold your assets for longer than a year (or whatever period applies in your country), it makes sense not to worry about the problem as much.
Bottomline
Buying cryptocurrency is risky, and you should research it before taking the plunge. Although investing in cryptocurrency can be very lucrative, it’s also an extremely turbulent market.
Never invest money you can’t afford to lose. Cryptocurrencies are a high-risk investment, and many new investors have lost their shirts because they weren’t prepared for the volatility of the market.
Investing in cryptocurrency is a long-term commitment—you shouldn’t try to make a quick buck by buying and selling on a daily basis. If you want to trade cryptocurrencies, consider day trading instead of investing in cryptocurrency.
To invest wisely, you need to spend time researching various cryptocurrencies on the market so that you can make an informed decision about which ones are worth your money. It’s crucial to educate yourself as much as possible before taking the plunge into this unstable market.
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