Thinking of investing in cryptocurrencies, or you have already invested your hard-earned money in one of the riskiest assets, there are always risks related to investment & cybersecurity when you are in the crypto space. In either case, understanding and knowing about these risks before making any move could be a make-or-break decision. Rajesh Laskary
Crypto has quickly shifted the gears from an investment instrument that used to advocate, “ONLY INVEST WHAT YOU CAN AFFORD TO LOSE” to “REGULARLY INVEST IN BITS AND PIECES.” Over the past few years, the value of cryptocurrencies has soared, making them a high-risk, high-reward investment. According to Statista, the number of crypto users rose by 190% from 2018-to 2021. By 2022, around 221 million people will have invested in crypto assets in one way or the other. If you consider buying your first crypto or have already bought one and are now looking to expand your portfolio, you should know the inherent risks. In this article, I’ll try to explain various risks, including investment-related risks and cybersecurity risks related to crypto investments.
Investment Risks Related To Crypto Investments
Even though cryptocurrency has been around for a long time, it has recently become increasingly popular amongst investors with the rise of NFTs (Non-Fungible Tokens), DeFi (Decentralized Finance), etc., as they seem to offer a way to buy into the future. Being a new and emerging asset class, cryptocurrency trading and investment have several risks associated with it. Similar to traditional investment instruments, cryptocurrencies have investment-related or systematic risks, as given below:
1. Market Volatility
Cryptocurrency is one of the most volatile asset classes as prices of cryptocurrencies keep soaring up and down drastically in a matter of seconds. For instance, between March 2021 and June 2021, Bitcoin came down from $60,000 to $30,000; however, in October 2021, it again surpassed its all-time-high to make a new high of $69,000. As one can see, in a matter of a few months, it showed a movement of thousands of Dollars, both upside, and downside. And this is only the most “stable” cryptocurrency we’re talking about.
Let’s look at another example – In April 2021, a simple tweet from Elon Musk skyrocketed the price of Dogecoin by a whopping 400%. But earlier in May 2021, some wild speculations about Dogecoin caused it to lose over a third of its value.
Hence, investors just beginning their crypto journey need to remember that the crypto market can be driven by speculation, as a single tweet or a story featured in popular news media can cause the prices to plummet (or go up) in no time.
So, what can you do?:
- Never trade or invest in a coin/ token/ NFT/ ICO/ IEO, etc., based on sentiments and speculations; always remember that what goes up quickly can come down quickly too. It’s never a good idea to catch a falling knife.
- The old mantra ‘HODL’ (as an acronym for “hold on for dear life”) must be practiced with caution.
- If you’re trading, practice basic investment principles, such as ‘stop-loss.’ So you can exit timely and limit the size of your loss when things start to go against your analysis.
2. Lack of Regulations
Another essential factor that poses a significant risk for crypto investments is the lack of regulations. Governments in some countries have already enacted laws to regulate crypto usage in their countries. Since the crypto market doesn’t have the official backing of the government in most cases, investors must exercise caution before investing in crypto assets and projects.
So, what should you do?
- Familiarize yourself with regulations/laws pertaining to cryptocurrencies in your country.
- If your country has a few regulated crypto exchanges, you must leverage those instead of going with unknown or unregulated exchanges.
3. Tax Implecations
We can understand using the example of the US. In the US, cryptocurrency is classified under capital assets. As per the IRS guidelines, people buying goods or any service using cryptocurrencies will be subjected to capital gains tax. But buying, storing, and transferring crypto assets within exchanges are exempt from tax.
So, what should you know?
- Get yourself acquainted with tax laws pertaining to cryptocurrencies in your country.
- For example, think if dealing with cryptocurrencies comes under the same tax umbrella as stocks? How you’ll be taxed?, etc.
Security Risks Related To Crypto Investments
1. Risks arising out of cyber thefts and Scams
Illicit transactions, crypto crimes, and attacks hit an all-time high in 2021 as the cost doubled from $7.8 billion in 2020 to $14 billion in 2020. Due to their increased dependence on online transactions and anonymity, the crypto environment is a lucrative target for cybercriminals. Cybercriminals have started deploying sophisticated social engineering techniques to gain access to your crypto wallets and accounts. Unless people are aware of the latest cyber-attack techniques and strategies, they will easily fall prey to the hands of these cybercriminals.
So, what can you do?
- Always leverage additional security measures such as 2FA employed on all your accounts handling cryptocurrencies, be it wallets, exchanges, etc.
- Learn to identify fake websites and phishing emails. These days, many exchanges have started to provide an anti-phishing code with each transactional email they send. Always keep that option enabled.
2. Risks pertaining to P2p or ‘Peer to Peer’ Transactions
Crypto exchanges encourage peer-to-peer trading of cryptocurrencies to allow users to connect with buyers/sellers directly. In a P2P crypto transaction, a user directly buys/sells crypto assets with other users. Even though they allow users to quickly convert their crypto assets into fiat money, they come with their inherent risks. Since users are dealing with other users in the exchange directly, there is always a possibility of the other party defaulting on their part and disappearing away with your money.
What can you do?
- Choosing a crypto exchange with an escrow service is always advised to avoid these fraudulent schemes. The exchange holds your tokens with escrow service unless the buyer completes the payment.
- Opt for P2P platforms that have been around for a while and have made a reputation for being safe for users. Avoid P2P transactions with exchanges that don’t have a good track record.
3. Loss of Private Keys or Passwords
The security of cryptocurrencies largely relies on the cryptographic system that involves both public keys and private keys. The public key is known to the public, whereas the private key is known only to the account owner. Without these keys, no one can access the crypto assets. It is similar to your bank account number and the bank password. The public key is like the bank account number, and the bank password is like the private key that provides ownership of the wallet to the user. If the user loses the private keys, they lose control and ownership of the crypto wallet and won’t be able to access their crypto assets.
What should you do?
- Always backup your private keys or passwords in a secure place
- Never share your private keys /passwords with anyone on a Telegram channel, Discord, etc. Malicious actors would often pretend to be the admin of the group and ask you for your private keys to release your crypto rewards, etc.
Cryptocurrency Investment and Security Best Practices to Ensure Safety of Your Crypto Assets!
- Crypto Exchanges: Open a trading account only on a trusted exchange. Evaluate the top 100 crypto exchanges by Cybersecurity rating and evaluate which one best suits your investment or trading needs.
- Take your time, thoroughly research and evaluate an exchange based on the transaction fees, security, liquidity, etc.
- Get the answers to the questions such as – Is the exchange transparent about its security measures? Does it store customers’ cryptocurrency in offline wallets (cold storage)?
- Avoid using a crypto exchange if there is no physical address associated with it; or when there are no founders mentioned for the exchange.
- The Cryptocurrency Project You’re About to Invest in: Read the whitepaper carefully and thoroughly evaluate a cryptocurrency project before investing in it. You must research the following before investing in a project:
- What is the use case behind the project?
- What unique problem is it trying to solve?
- Who is the team behind it? Do they have authentic LinkedIn profiles?
- What’s the roadmap?
- Crypto Wallets: Use secure wallets. Some of the best software wallets to use are MetaMask, MyEtherWallet, etc. Some of the best hardware wallets are Ledger Nano S, KeepKey, Trezor Model T, or Trezor Model One.
- If you are into P2E (Play-to-earn) gaming, NFTs, active trading, and only dealing with an amount you can afford to lose, you can use a software wallet, such as MetaMask, MyEtherWallet, etc.
- If you have sizeable amounts of cryptocurrency investment, it’s always advisable to use a hardware wallet, such as Ledger Nano S, KeepKey, Trezor Model T, or Trezor Model One.
- User ID and Passwords: Follow the password best practices, such as:
- Use complex passwords that can’t be guessed easily.
- Have a combination of uppercase and lowercase letters, numbers, and special characters and are 12-14 characters long.
- Do NOT share your user ID or passwords with anyone.
- Private Keys: Remember, if your private key is lost or compromised, your crypto assets are also lost. Follow the security best practices, such as:
- Always keep a backup of your private keys
- Never disclose it to anyone
- MFA: Always enable 2-factor authentication or multi-factor authentication (MFA) on your exchange account via your email, mobile number, or via an Authenticator app.
Cryptocurrencies are quickly becoming a preferred investment choice by individuals and institutions alike. Various reasons attract investors to cryptocurrencies, such as they are decentralized and offer global access to investors, and can be used for transactions of any size. However, there are several investment and security risks related to crypto investments. As a new investor, you must do your due diligence and ensure you’re investing in projects after verifying them thoroughly. As mentioned in this post, the guidelines should help you begin your crypto journey if you’re a new investor and should serve as a revising note for seasoned crypto investors as well.
Author: Rajesh Laskary