Understanding the Risks
Investments are subject to market risks
Either way, taking on risk is part and parcel of the investing experience. A smart investor can minimize risk, but to eliminate it entirely is impossible. Or illegal.
This is especially true when investing in cryptocurrency, where years of volatility in the stock market can be covered in a month of pricing movements. It’s not uncommon for the value of cryptocurrencies to quickly drop (or rise!) by hundreds, if not thousands of dollars in a few weeks.
But what makes cryptocurrency so volatile? And is that the only risk associated with it? Both great questions, that we’re going to address.
What Makes Crypto So Volatile?
Crypto Has No Inherent Value
Despite the valuations we may see in the market, cryptocurrency has no value in and of itself. In addition to this, cryptos don’t typically return dividends or earn revenue – making it difficult to find a proxy to estimate value. Without a reliable indicator, their value relies entirely on market sentiment – which is fickle at best.
Regulation Has Yet to Catch Up
Regulation for crypto is still in its early stages. This limited oversight means crypto markets allow for market manipulation, which in turn introduce volatility.
So, is volatility the only risk? Short answer - no.
In addition to price fluctuations, crypto comes with a few more risks:
- Every transaction is irreversible, making it impossible to recover funds sent to an incorrect address.
- It’s susceptible to error and hacking: there is no perfect way to prevent technical glitches, human error or hacking.
- A cryptocurrency can be discontinued or “hard forked”.
Price volatility is a major risk, but it isn’t alone. Fortunately, all these risks can be minimized with a careful investing strategy. Let’s talk about dollar-cost averaging.