A Cryptocurrency is a form of digital money. Cryptocurrencies run on a decentralized network, which allows them to exist outside the control of central authorities. Transactions can be cleared with no trusted third party standing between payer and payee, and are designed to ensure that the payor has the funds and that each transaction is completed. 

Bitcoin is the most widely known cryptocurrency, and the one with the largest total value. It is a fiat currency, meaning it is not linked to anything with intrinsic value and is not legal tender in just about every country, with the recent exception of El Salvador. Therefore, Bitcoin has value only where individuals and firms choose to accept it in exchange for other things (such as dollars or Indian Rupees).  

How to invest without buying any token

Think of this strategy as cryptocurrency investing once removed. Some publicly traded companies have cryptocurrency holdings. And because they are betting on its success, you can too, with those companies acting as a buffer.

As of June 30, 2021, Tesla held $1.31 billion in digital assets. And while the tech giant has received lots of media attention for its investment, that $1.31 billion currently equates to only about 2.4% of Tesla’s total assets. But if those assets balloon in value, as cryptocurrency is sometimes wont to do, Tesla’s stock value could too.

Another way to gain exposure is to invest in companies that have a stake in the cryptocurrency industry. Coinbase is a platform where investors can buy and sell cryptocurrency – and it’s publicly traded. Riot Blockchain Inc. is one of those few publicly traded companies that focus on cryptocurrency mining. Riot Blockchain, among others, helps build cryptocurrency infrastructure and provides another cryptocurrency-adjacent investment opportunity.

Top 10 Cryptocurrency and Bitcoin Risks

1. Wide Entrance, Narrow Exit 

It is true that the advent of bitcoin and its ilk of cryptocurrencies, of which there are more than 1,600 and counting that have been digitally minted, has democratized many aspects of finance. This lowered barrier to entry creates a wide entrance and a very narrow exit, which as is prone to happen in the real world during Black Friday shopping frenzies for example, can lead to collateral damage as people rush to get out. The exit can be barred due to technological constraints, currency inconvertibility and few counterparties with whom to trade. While the asset class is generally uncorrelated to the traditional economy, it is all correlated to itself, which can create market panics and runs.

2. They can be affected by Gapping

Market volatility can cause prices to move from one level to another without actually passing through the level in between. Gapping (or slippage) usually occurs during periods of high market volatility. As a result, your stop-loss could be executed at a worse level than you had requested. This can worsen losses if the market moves against you.

3. Bitcoin isn’t Money

Another reason that Bitcoin is so risky is that it is a trade able asset but it is not backed by anything. Bitcoin has value only because the people who are trading it say it has value. There are no governments or regulatory bodies helping Bitcoin retain its value. The value is all basically “made up,” for lack of a better word. To put it another way, as uber-investor Warren Buffett did, “[Bitcoin] has no unique value at all.” This makes it an incredibly risky investment if the market ever decides it’s no longer valuable.

4. Cyber Risks on All Sides 

As is true with cyber threats, which evolve according to Moore’s law, the space between the keyboard and the chair (or the smart phone and the digital wallet) is as important as the cyber hygiene and defenses of the crypto custodian. While in principle the bitcoin blockchain has proven to be among the most cyber resilient innovations thus far, the firms that plug into it, like other cryptocurrencies, are often new entrants with lax cybersecurity standards and wherewithal. By this measure, not all cryptocurrencies are created equal in term of their traceability, transaction ledgering and levels of trust or fiduciary responsibility. For this, risks as simple as “mysterious disappearance” and as complex as ransomware attacks and AI-powered bots scouring the Internet for weak links and easy prey are complex and fast-moving perils.

5. Investment Risks compared to Traditional Assets

A firm or individual that includes cryptocurrencies in its portfolio obviously loses if the value of such instruments falls a lot. This is normal investment risk, but the novelty of the instruments makes assessment of such risk more challenging than in the case of conventional assets.  

6. Bitcoin is not as Disaster-Proof as people think

One of the biggest arguments for investing in Bitcoin during and after the pandemic is that it is a great hedge against fiat currency, national banks or even the entire financial system, should it fail. The pandemic made these scenarios seem more plausible than ever but thinking that Bitcoin will be your salvation in these situations is probably false.

If fiat currencies or the traditional financial systems ever fail, governments and central banks would respond by holding tangible assets like gold in vaults as an alternative, not cryptocurrencies like Bitcoin. Also, if the collapse went even further and took down technology, electrical grids or even the entire internet, how would you access your Bitcoin then? It’s something to think about when you hear that Bitcoin is the best way to protect yourself from future disasters.

7. Intangible, Illiquid, Uninsured 

 The true miracle of blockchain-based cryptocurrencies, such as bitcoin, is that the issue of double counting is resolved without any intermediary, such as a bank or banker. This feature captured by the notion of digital singularity, where there can only be one instance of an asset is powerful and one of the primary reasons this asset class has blossomed. However, the intangible and illiquid nature of cryptocurrencies hampers their convertibility and insurability. Indeed, despite reports of growing insurer interest in the segment, the majority of crypto-assets and crypto companies are either under-insured or uninsurable by today’s standards. There is no deposit insurance “floor” for this asset class, which can help broaden appeal and investor security.

8. Technological Risks 

There have been many reports about the computational complexity and energy consumption of bitcoin mining, as one example of some of the technological limitations of cryptocurrencies. This computational complexity may also work in the inverse and pose potential risks to the asset class under the premise that complex systems fail in complex ways. It is true that the decentralized feature of true blockchain structures gives then an inherent disaster and risk-proofing that is not enjoyed by centralized databases (which are veritable honey pots as evidenced by Equifax’s massive breach). Yet not all cryptocurrencies or tokens are riding on similar rails. For this, investors should beware of the technological risks and false promises of decentralization that are being made in many projects, for not all blockchains are created equal.

9. It’s about risk and your willingness to accept both Gain and Loss

As a futures trader, you can at least rest assured that the futures markets traded on the exchanges are regulated. If you have a dispute, you will have a regulatory audience. If you step outside this world toward the unregulated and decentralized world of cryptocurrencies, you may be on your own. Maybe you’re willing to take that risk. If you are, then it’s important to fully understand what you’re getting into not just what you can gain, but everything that you can lose.

10. Other Risks

Ownership of cryptocurrencies is unenforceable in court, so an investor has no recourse if their cryptocurrency is stolen or lost. Similarly, an investor typically has no legal recourse if transactions are completed on terms that differ from those to which they agreed.

The tax status of cryptocurrencies might change, and varies by country. In absence of proper regulations in India, it is still unclear whether it is a currency or commodity. While profits gained by investing in cryptocurrencies are subject to an Indian capital gains tax, reporting requirements are still unclear. 

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