Investments in Bitcoin tokens, NFTs, Blockchain gaming, and decentralized finance have all had their ups and downs. Successful investing, and trading, depend upon limiting risk as well as on spotting profit opportunities. Should you be concerned with a blockchain hack of the crypto exchange where you have your Bitcoin stashed? How about poor business practices and even fraud that leads to the collapse of a DeFi business? What is the biggest crypto risk and how can you avoid it?
Crypto Risks from Blockchain Issues
Over several years Bitcoin grew in value from pennies to tens of thousands of dollars. While those who got in early and stayed the course earns handsome profits in Bitcoin and other tokens, others experienced extensive losses. Many of those losses were from technical issues related to the blockchain. The simplest problem is that you need to remember your public keys, private keys and wallet addresses (codes) that give you access to your wallet where your crypto assets are stored. There are individuals who bought into Bitcoin when it was worth less than a penny who lost their codes and now cannot access millions of dollars in Bitcoin value! Other issues include blockchains being hacked and crypto assets being stolen via 51% attacks, flash loan attacks, and loopholes from inadequate blockchain coding. These are still significant issues but, in our opinion, they are not the biggest crypto risk.
Crypto Volatility Risk
There are two common ways to make money in markets for stocks, commodities, foreign currencies, or cryptocurrencies. One is to identify the potential of an investment, put your money in early, and wait as the price goes up. The other is to try to time the market. Buy when the price is low, sell when the price is high, and repeat as often as possible. For folks who use market timing to profit from cryptocurrencies, volatile markets offer the greatest profit potential and also carry the greatest risk. Anyone who bought Bitcoin for $900 at the start of 2017 and sold at the momentary $19,650 peak in December of that year made out like a bandit. Likewise, anyone who bought at $6198 at the March bottom in 2020 and sold at the $61,283 March 2021 peak also earned impressive profits. The problem is that many bought when the crypto market was at its highest and then, despondently, sold at a low point for devastating losses. That brings us to what we believe is the biggest crypto risk.
What Is the Future of Cryptocurrencies?
It seems that every time Bitcoin and the rest of the crypto world falls from a peak price, there is a late-20-ish dude doing the rounds of the business talk shows. He (or she) is explaining how crypto is utterly unique, the wave of the future, a secure store of value, a hedge against inflation, and going to soar to greater heights in the very near future. At the same time there seems to be a surge in Bitcoin wash trading which appears to be meant to fool the market into thinking that greater interest in Bitcoin exists than is actually true. What we have found to be true during the depths of crypto winter is that Bitcoin and the rest of the crypto world are tied to the same economic factors like inflation, interest rates, and recessions that drive stock prices. The biggest long term risk in cryptocurrencies is to buy into the hype and the story that Bitcoin will go up forever as the rest of the financial system falls in ruins. In the days of the California gold rush there was a saying: When everyone is digging for gold, the best business is selling picks and shovels. In the world of crypto it is our belief that those tokens (like Ether) that are tied to the most and best economic uses of the crypto system like blockchain gaming, decentralized finance, the Metaverse and NFTs will be viable investments going forward. Those that only have speculative value will always be risky with profits for some and losses for many others.
What Is the Biggest Crypto Risk? – SlideShare Version