There are several things to consider when investing in cryptocurrencies. Right now, many crypto investors are worried about how far Bitcoin and the rest will fall before beginning a recovery. We all wish that we had bought Bitcoin when it was pennies or dollars. Anyone who bought at Bitcoin’s high in November of 2021 is licking their wounds as the dominant cryptocurrency has lost more than two-thirds of its peak value by June of 2022. Should an investor look at the major cryptocurrencies going forward or pick one of the new kids on the block in search of greater profits? That brings to mind the risk of failed cryptocurrencies.
How Many Cryptocurrencies Have Failed?
Since the invention of Bitcoin more than ten thousand new cryptocurrencies have been introduced. Some have been quite successful. Many do not amount to much and, according to Coinopsy, more than two thousand cryptocurrencies have failed. Many more are likely to fail or have already failed but have not been counted. Why does a crypto project fail? As we have noted in regard to choosing crypto investments, long term value of a cryptocurrency will most likely be tied to its usefulness in accomplishing monetary transactions in the worlds of decentralized finance, non-fungible tokens, or the Metaverse. Many cryptocurrencies have been developed without much thought given to their usefulness. This is much like the dot com bubble in the late 1990s when, for a brief time, people invested in stocks simply because they had dot com in the name! Additionally, too many crypto systems have flaws that spell their doom even before they start or expose them to being hacked. We noted this in our article about broken crypto and NFT dreams.
How Can You Predict Crypto Failures?
A common theme in the failed crypto niche is new schemes that simply copy existing ones. Why invest in a copy of Bitcoin when there is already a Bitcoin, Ethereum, etc.? Functionality is important but competition is intense in this severely crowded niche. Interestingly, the SEC developed a fake cryptocurrency, the Howey Coin. The purpose was to instruct investors as to the risks of crypto investing. Risks include hacks and scams. The Nevada-based OneCoin scam was a Ponzi scheme. Gullible investors were told that they would get three-for-one returns by investing Bitcoin or dollars in the new cryptocurrency. What happened was that the original investors were paid with money from subsequent investors to maintain an appearance of legitimacy until the perpetrators of the scheme walked away with as much as $19 billion. Avoid obvious copies of existing cryptocurrencies and always remember the Roman adage, Caveat Emptor, let the buyer beware. Any scheme that looks too good too be true is most likely too good to be true. The Bitconnect scheme was supposed to provide 120% annual returns and resulted in huge losses.
Hacked Into Oblivion
Perhaps the most famous crypto hack was Mt. Gox in 2014 where hackers got away with 850,000 Bitcoins. At the time this amounted to about $255,000,000. Whoever has these today has 1.6 billion in dollars even at the current market low and the original investors have nothing. The take-home lesson is that not all new crypto schemes work out. If you are thinking that by getting in on the ground floor of a very cheap new cryptocurrency, remember that you could more easily lose your investment in a failed cryptocurrency than cash in on one of the rare cases of a new winner in this crowded niche.
Failed Cryptocurrencies – SlideShare Version