A lot like buying and trading commodities and government-issued currencies, buying cryptocurrency isn’t a risk-free endeavor. Cryptocurrency has a volatile price that can make it riskier than stocks and other kinds of investments. However, that volatility can make it more profitable too, which makes it tempting if you’re looking for another way to earn money. Cryptocurrency is an emerging technology and the knowledge that is needed to securely purchase and store your cryptocurrency can add to the risk involved.
What Are The Risks Associated With Cryptocurrency?
There are three main risks that come with buying and owning cryptocurrency.
- The value of cryptocurrency could decrease after you buy-in.
- Someone could get access to your private key and take your cryptocurrency.
- You could lose the private key that allows you to get access to your cryptocurrency.
The first risk is the same risk that is associated with any kind of investment, even with low fee trading platforms, with traditional or cryptocurrency. Whether you’re buying stocks, bonds, mutual funds, indexes, or lending money, there’s always a risk that the value of your investment will drop or the other person won’t pay you back. You could even lose your entire investment.
Cryptocurrency is a volatile investment, which means that the price can quickly move up or down. If you buy cryptocurrency now and sell it later on when its value is higher, then you could make a lot of money. In 2020, Bitcoin, one of the most popular forms of cryptocurrency, reached a low value of around $3,800 but closed out the year nearing a value of $30,000. This shows an opportunity for profit. Over the last few years, people have made big investments in cryptocurrency only to see the price crash from nearly $20,000 per bitcoin to less than $3,500 per bitcoin over a short time. This is a drop of over 80%. If you want to get into cryptocurrency, you should keep this risk in mind.
There other potential risks are with your private key. You will never physically possess cryptocurrency. Cryptocurrency is digital-only. However, your private key is what gives you the ability to spend or transfer your money, and that gives you ownership over the cryptocurrency associated with that key.
If someone gets access to your private key, they will be able to transfer your cryptocurrency into their own digital wallet, and you might not be able to get your money back.
There are people who choose to keep their private keys on their own rather than using an online wallet. You could do this by writing down the key keeping it on a storage device like a thumb drive. This is a safe option, especially if the storage device you use isn’t connected to the internet. However, there is a risk of losing your private key. There have been some tales of cryptocurrency investors losing a lot of money after losing, throwing away, or washing a storage device with their private key stored on it.