4 risks to watch in crypto that everyone must know
When instances of peak crypto include gleaming fleets of Lamborghinis as a mirror of price surges and promises of a crypto-utopia with no central governments, you know we’re reaching the pinnacle of the hype cycle on blockchain and cryptocurrency. Nonetheless, there are a number of significant hazards that afflict this asset class and obstruct its widespread acceptance and stability.
While there is no doubt that cryptocurrencies, digital tokens, and blockchain-based business models are here to stay, understanding how risk interacts with this emerging market and its underlying technologies will help investors and provide regulators with a steady hand. And hopefully, guide how entrepreneurs approach risk management in their projects, which is difficult to do after the fact.
One distinguishing feature of blockchain-based initiatives is that, unlike the analog economy which aims to code good behavior in those who have custody, control, and custody of our funds and assets, “good conduct” may be written at the technological layer and in an unalterable and visible manner.
In other words, a machine is not intrinsically greedy or morally ambiguous (risk-taking without bearing the consequences).
The following are 4 instances of important hazards that threaten cryptocurrencies and obstruct market advancement.
1. Wide Entrance, Narrow Exit — It is true that the introduction of bitcoin and other cryptocurrencies, of which there are now over 1,600 and counting, has democratized many elements of finance.
This decreased barrier to entry generates a huge entrance and a very limited exit, which, as is common in the real world during Black Friday shopping frenzy, can result in collateral harm as people race to get out.
Due to technological limits, monetary inconvertibility, and a lack of counterparties with whom to trade, the departure may be blocked. While the asset class is uncorrelated with the traditional economy, it is highly correlated with itself, resulting in market panics and runs.
2. Intangible, Illiquid, Uninsured. The actual marvel of blockchain-based cryptocurrencies like bitcoin is that the issue of double-counting is handled without the use of a middleman like a bank or a banker. This property, which is encapsulated by the concept of digital singularity, in which a single instance of an asset may exist, is strong and one of the key reasons this asset class has grown.
However, cryptocurrencies’ intangible and illiquid character (coupled with the argument made above concerning constrained exits) makes them difficult to convert and insure. Despite claims of increased insurer interest in the sector, the bulk of crypto-assets and crypto-companies remain under-insured or uninsurable by today’s standards. This asset class has no deposit insurance “floor,” which might assist extend its appeal and providing investor protection.
3. From Extortion To Manipulation — While no investor should put money into cryptocurrencies that they are not willing to lose, no matter how little the amount, cryptocurrencies are especially vulnerable to social engineering and disinformation hazards. Cyber extortion, market manipulation, fraud, and other investor dangers may be easy prey for the naive, just as they were in the analog economy.
The Securities and Exchange Commission (SEC) of the United States has gone so far as to create a phony initial coin offering (ICO) website in order to warn potential crypto investors about “shiny object” hazards. Indeed, a rising area of securities interest is increasing regulatory clarification on what defines a truly decentralized asset, such as bitcoin or Ethereum, which is outside the control of any single party, versus company-issued coins or tokens.
4. Cyber Risks On All Sides — The area between the keyboard and the chair (or the smartphone and the digital wallet) is as crucial as the crypto custodian’s cyber hygiene and defenses, just as cyber threats increase according to Moore’s law. While the bitcoin blockchain has shown to be one of the most cyber-resistant developments to date, the companies that plug into it, like other cryptocurrencies, are frequently newcomers with inadequate cybersecurity standards and resources.
In terms of traceability, transaction logging, and degrees of trust or fiduciary duty, not all cryptocurrencies are created equal under this standard. Risks as basic as “strange disappearance” to as complicated as ransomware assaults and AI-powered bots combing the Internet for weak links and easy victims are complex and fast-moving threats for this reason.
Countless new entrants see that a new technology-driven tsunami of wealth creation is upon us, whether they are huge traditional organizations that have woken up to blockchain’s promise, or startup teams’ intent on building a new democratized future that challenges the status quo. Understanding the risks of jumping into this tidal wave will assist cryptocurrencies’ long-term prospects and expand their popularity beyond risk-aversed early adopters.