The risk involved in Cryptocurrency Trading: What you need to know
The risk involved in Cryptocurrency Trading: What you need to know

The risk involved in Cryptocurrency Trading: What you need to know

Many cryptocurrencies such as Bitcoin and Ethereum have high goals to achieve over long periods. While the success of any cryptocurrency project is not ensured, the early investors could receive a rich payoff for a cryptocurrency project in the long run if it reaches its goals.

However, to achieve a broad adoption for every cryptocurrency project, long-term success is required. The legal status of digital currency is very confusing as it became popular recently compared to a common currency and payment systems. Below, we will look at some of the emerging legal implications related to cryptocurrencies investments.

You might have noticed or heard people getting rich after investing in cryptocurrency and you are thinking of joining the race to add to your portfolio. Although cryptocurrency is worthwhile, they are chancy.

They are very volatile, unexpected changes in the market can lead to sharp and sudden changes in the price. The price dropped in cryptocurrency to a hundred, even to a thousand dollars is a usual trend. Although they are unregulated, it attracts more attention recently. Unlike conventional currency, they cannot be physically own or transferred between parties. There is still doubt whether they are to classify as a commodity or virtual currency. They are susceptible to error or hacking and there is no perfect way to prevent glitches. It also carries additional risks as it carries hard forks or discontinuation. When a hard bucking occurs, there may have considerable price volatility.


Let’s discuss in detail the risks involved.

Bitcoin is still incredibly volatile.

Bitcoin and all cryptocurrencies, because it's such a young currency and market, are incredibly volatile. It is not rare that Bitcoin costs in a day or even in minutes fluctuate wildly. Trading is therefore a critical decision. In general, fundamental currencies would be supported for trading. Bitcoin is not fully functioning but its "fundamentals" continue to emerge.

It is instructive to consider the previous all-time high as a long-term investment. This occurred in December 2017 as the $20,000 mark was cut by Bitcoin. This may seem appealing now that Bitcoin trades regularly at $50,000-plus, but just a few hours later, in February 2018, the price fell to less than $7,000. This hasty drop could likely happen again easily.

Private Keys

Cryptocurrency is stored in a digital wallet and is only controllable by the digital wallet's public and private key holder that holds the bitcoins both uniquely. If the private key is lost or damaged or otherwise compromised, an investor may be prevented from accessing the bitcoins that are mainly lost inside the related digital baggage. This third party may be able to access bitcoins if the private key is acquired by a third party. A single private key is the unique public key and only the wallet owner can use.

Unregulated

Lack of regulatory frames means that price volatility and manipulation are highly uncertain. The regulations on cryptography are complex, disorganized, and haphazard. Tax treatment is a priority for investors. The lack of regulation or some term regulatory greyness means that some investors are frightened because they do not clearly understand which tax obligations are to be considered or which records must be kept.

The good news is that regulatory authorities are getting up to date. Authorities undertake steps, prepare research papers, standards and introduce new regulations in many jurisdictions. Switzerland is one of the first countries to begin building a robust regulatory framework. The country has proposed an idea for minimizing rules while keeping companies in line with legislation through ‘sandboxes,’ allowing start-ups to experiment and innovate within controlled conditions.

Susceptible to Hacking

There is a belief that cryptocurrency provides hackers or criminal organizations a new means to commit fraud or money laundering. Unfortunately, investors who

are victims of this financial crime probably do not have the same legal options as traditional victims of fraud. The problem also concerns digital currencies' decentralized status. For example, when a cryptocurrency exchange is hacked, and the holdings of customers are stolen, no standard pattern has been observed for recovering the money.

A whopping of almost 120,000 Bitcoins were stolen from the Bitfinex exchange in Hong Kong in August 2016 representing a value of US$72 million, resulting in an immediate price decline of 23 percent. One year earlier, BitPay lost about $1.8 million of bitcoins due to a phishing attack in September 2015. Furthermore, if one or more malicious actors get control of enough Bitcoin Network consensus nodes or other means of alteration, then a Blockchain can be altered. Although the Bitcoin Network is decentralized, concentration by creating 'mining pools' and other techniques increases the risk of one or several actors controlling the Bitcoin Network or other similar Blockchain.

Hard Fork or Discontinuity

 A hard fork is when nodes of a blockchain's latest version no longer accept the earlier blockchain version(s), creating a continuing disagreement with the previous blockchain version. Adding a new rule in code generates a boundary in the blockchain: one route follows the new and upgraded blockchain, while the other route follows the old road. For example, Ethereum experiences a permanent bifurcation in its Blockchain in 2016 that produced two different versions of its digital currency, Ethereum (ETH) and Ethereum Classic (ETC). Very recently, Bitcoin also had its first fork that led to the creation of a new cryptocurrency Bitcoin Cash (BCC).

 

In the end, it's up to the traders to decide what’s best for them. If you are ready to step into the decentralized and unregulated world of cryptocurrency, you are on your own. If you are willing to take the risk, then better understand “what you will lose” not just “what you can get most out of it”.

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