Risk Assessment

Risks with Cryptocurrency

I am a frequent writer in Quora as well along with writing threads here. And today when I checked the questions asked to me through Quora, I found this and thought that this could also be my subject for a thread here.

So here are some of the risks associated with Cryptocurrency which I can think of:

1. Regulations

Though many will disagree with this point, this is something extraordinary indeed. One of the main risks of Cryptocurrency is due to the lack of Regulation. And sometimes, the involvement of Regulations.

Lack of regulations in this sphere has opened the doors for many scammers. Many people have lost money to Scams in the Cryptocurrency sector. And if there is a lack of regulation, this will continue to grow.

At the same time, the unnecessary involvement of regulations has also restricted potential users from accessing this opportunity. Which not only is a problem for the user but also for the country due to brain drain and people seeking other viable options.

2. Damage of HardDisk/Wallet

What would happen to your cryptocurrency holdings if your hardware where you have stored your wallet got damaged for some reason?

Have you done a proper backup to save you from a situation like this?

If not, this would be the end of your cryptocurrency unless you can make a data recovery.

The same goes for hardware wallets or paper wallets. Hardware wallets like Ledger, Trezor, etc. though are sturdy, but are not unbreakable, so if something happens to that, or you forget them somewhere, though your funds would be safe, if you don’t have access to the seed words, then you can say bye bye to your funds.

3. Forget the Password/Pin

This is comparatively a low level of risk. If you are using crypto exchange and you lose the password, there are some ways to get around it, but this task involves time.

And if your exchange is one among the top of the ladder, the time taken to solve this would also increase.

Once due to a technical problem in Poloniex, I lost some funds, which was returned to me not days or weeks, but after months!

Now coming back to hardware wallet, those also nowadays comes with PIN facility, and if you lose that along with your seed wallet, you can bid bye to your funds.

4. Loss/Damage of Phone/2FA Key

With the increased activity in the crypto space, more and more people are interested in this. And at the same time, more and more people try to break into your account in exchanges, etc.

Thus, exchanges nowadays try to get their users to use 2FA or Two Factor Authentication. It is an extra layer of security on top of your current password. 2FA generally links to Google Authenticator, which either can be added to your chrome or you have to have a mobile phone where you can install it.

Each minute the app creates a new password based on a key (given by the individual exchange, or service provider). And after you input your password, you add a six digit pin using this app.

But what happens if you lose your mobile? Or damage your mobile and loss access to this app? Getting back access would be much more stringent than losing your password. And that is in the case if you are using a 3rd Party service provider.

5. Use of 3rd Party Services

Though there are certain advantages of using a 3rd Party service provider, it also means that you don’t own your token/coin. You are at the mercy of that service provider. And if something happens to that service provider, you can either lose part/full of your funds.

If a hack happens and if it is severe, that can result in inaccessible funds for a long time based on how the exchange handles these.

Also, if the service provider goes dark, you have lost your funds forever.

Nowadays, the chance of this happening is less as more and more company needs to comply certainly, you thought right “Regulations” and also have a public face and many people like me do analysis and research on projects and companies! Still, this can be a possibility of risk.

6. Investment of funds

Now let’s come back to our faults due to which we can create risk if we use Cryptocurrency.

And the top one is Investment of our hard earned money into cryptocurrency. Many people invest in cryptocurrency, and I don’t have a problem with that. But the risk comes up when you spend the funds you are not supposed to like taking a loan to invest in Cryptocurrency — or borrowing funds from your friends and family to invest in this.

You risk not only losing your funds, but also other things. Always keep this in mind:

“Never invest even a penny, which you could not afford to lose.”

Once you invest, that money is gone. Even though you say that you made money, until and unless you have realized the profit, it is still not a profit.

Also, due to the current bear market at the time of writing this, even if you realize the profit in BTC/ETH, the gain in $ may decrease with time though it won’t have any effect on the profit you made in BTC/ETH.

7. Lack of Knowledge

Now that you realize that what you can invest and what not. The next thing is to gain some knowledge. Investment and Trading without the understanding of what you are getting into are like you bundling up the money to fire it up.

If you value your money, then take some time and spend on learning and understanding of what you are investing. If you like to trade, then spend some time on understanding Technical and Fundamental Analysis of that asset.

8. Lack of Security of Funds

Now that you have some fund, you should also learn how to keep it secure. For the money, traditionally people go to a bank and/or get lockers. Similarly, for the cryptocurrency, the safest wallet would be one where you and only you have access to the funds. And by that, what I meant is only you have access to the private key. Don’t know what private key is? Maybe it’s time to re-read the Point 7 and get some knowledge about these.

So, how can you secure your funds? You can use a paper wallet and keep that paper secure. You can also use hardware wallets mentioned before in this thread to ensure your funds. Every hardware wallets require the owner to create a new seed word initially, and that is told to be written and stored in a secure place so that even if you lose/damage the hardware wallet, forget the pin, etc. you can have access to your funds through this seed fund.

9. Lack of Common Sense

This is something you require for any investment and any asset. Sharing your private key with anyone? NO! Sharing where you store your seed words? NO! Sharing your whereabouts online, like you are going somewhere, etc.? NO! There are incidents where a thief has used social media to know whether the owner was at home or not.

So please use your common sense more than your social network.

10. Plan for Inheritance

This can be a risk to your fund, though it might not be the same for everyone. Better to have an idea on how your funds can be hand over to the next generation or someone after your demise, rather than to go unused by anyone.

For traditional assets, if money is in the bank, they are either given to your nominee provided to the bank or if they are not found, then most times it goes to the bank.

But for crypto, those become inaccessible, if the owner doesn’t have thought about how to transfer it.

Published by Shebin John

An engineer by Profession, Marketer by Choice and Investor by Passion. Computer Science Engineer who loves to spend time learning new things, technologies, and frameworks.