Cryptocurrency is a digital asset that is secure by cryptography and based on decentralized networks of computers. Unlike most traditional currencies, cryptocurrencies are not backed by any natural resource and don’t track the growth potential of enterprises, such as stocks do. This makes them more speculative assets and subject to large price fluctuations. Some investors buy cryptocurrencies in hopes that their value will increase significantly, and they then sell them for a profit.
While some people believe that crypto is nothing more than a fad, others think it has the potential to revolutionize finance and other areas of the economy. The most popular use cases for crypto focus on supplanting and/or facilitating financial transactions and other traditional banking functions, with the ultimate goal of creating a new global ecosystem of money.
However, these use cases also have risks that should be considered at the outset. These risks include regulatory, cybersecurity, and accounting considerations, among others.
Regulatory Risks
The United States and other countries have different regulations governing the purchase, sale, storage, and trading of crypto. The Securities and Exchange Commission, the Commodity Futures Trading Commission, and other agencies have cracked down on some initial coin offerings (ICOs) and have increased their oversight of the cryptocurrency industry. A sudden regulatory crackdown could make it difficult to buy or sell cryptocurrencies and trigger a market-wide price drop.
Cybersecurity Risks
The security of crypto is a complex issue that is still evolving. Cryptocurrency transactions are secure if conducted on platforms that are regulated and adhere to strict anti-money laundering and other security standards. Most cryptocurrencies are secured by blockchain technology, which creates a shared, unchangeable ledger enforced by a disparate network of computers. Blockchains have a built-in security feature that prevents double-spends by requiring that an attacker possess both your private key and the password to access your wallet.
Because of these security features, many investors choose to store their crypto on wallets that are “off-chain,” which reduces the likelihood of hacking or theft of your funds. But these off-chain wallets can still be vulnerable to malware, and you should always back up your wallet files to a secure computer or hard drive. You should also consider how your crypto use may affect your taxes; it’s important to talk with a tax professional for more information.
Cryptocurrency Accounting Risks
Many investors hold their crypto in accounts with third parties, such as exchanges or custodians. These third parties can be subject to cybersecurity threats, and they are usually not insured or regulated by the federal government. The lack of regulation and oversight has left many investors vulnerable to fraudulent or unethical management practices, which can wipe out their investment in a matter of hours.
Finally, it’s important to note that cryptocurrencies have transaction and conversion fees, similar to credit card or wire transfer charges. These fees vary by platform, and they should be factored into any crypto investment calculations. Additionally, the value of a given crypto can fluctuate daily or even minute to minute, making it harder for consumers to plan spending if they are concerned about volatile prices.