Cryptocurrency inspires passionate opinions across the spectrum, from those who believe it’s a transformative technology to those who worry it’s a fad. Here’s a look at the key issues to consider before jumping in:
Market volatility
Like other markets, crypto is volatile. Prices rise and fall at will, and even the most stable cryptocurrencies can see large, quick swings in value. That volatility makes it a riskier investment than most other types of investments. It’s important to only invest money you can afford to lose, and to diversify your portfolio by investing in different cryptocurrencies.
Security
Blockchain, the system underpinning most cryptocurrencies, is designed to be secure. It spreads data across multiple computers, so it’s more difficult for hackers to tamper with. But like any software, it’s vulnerable to attack, so users should follow best practices when storing their cryptocurrency. This includes keeping software and hardware wallets updated, avoiding suspicious software and websites, and regularly backing up their wallets. Hardware wallets offer a higher level of security by storing private keys offline and requiring an individual’s unique password to access funds.
Energy consumption
Some cryptocurrencies, such as Bitcoin, require significant amounts of electricity to function. This is because they use a complex encryption process called “proof of work” that requires a lot of computational power. As a result, their values can be impacted by changes in the price of electricity or other environmental factors.
Volatility
Cryptocurrencies are a new asset class that is not regulated by federal agencies, and they’re often subject to market fluctuations that can make them unsuitable for some investors. In addition, some exchanges have been hacked, and the loss of funds can be severe.
Privacy/Anonymity
While some cryptocurrencies can provide a level of anonymity or pseudonymity, this is slowly being reduced as laws evolve to remove it for user safety and security reasons as well as to combat criminal activity. This is a risk that all crypto investors should consider carefully before investing.
Governmental response
One of the biggest challenges with cryptocurrencies is that governments around the world have yet to fully reckon with them, and this can impact the industry in unpredictable ways. For example, a regulatory change or crackdown may cause a crypto to spike or drop in value.
Another issue is that unlike traditional financial products, cryptocurrencies don’t have consumer protections in place, such as chargebacks. However, new technologies are being developed to address these issues.