Bitcoin has been trading at record highs for the past few months, with investors flocking to the digital currency in search of better returns. However, this recent spike in price has attracted speculative investors who have now become overly optimistic about the future potential of Bitcoin and other cryptocurrencies. Bitcoin and other digital currencies have seen massive spikes in price as investors become optimistic about their future. As of June 11, 2018, Bitcoin is trading at $6,455 after briefly hitting an all-time high of $7,823.09 on Friday afternoon — its highest value since December 22nd last year. Although it seems like a current bull run for cryptocurrencies right now, there are still plenty of risks associated with investing in digital currencies — especially if you don’t understand where those risks are coming from. This article will go through some of those risks so you can make an informed decision before risking your money.
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What Could Cause The Bitcoin Price To Drop?
There are plenty of reasons why the Bitcoin price may fall in the future. When investing in Bitcoin, there are a few things to keep an eye out for to help minimize the risks associated with the cryptocurrency. First, Bitcoin has been experiencing a massive bull run over the past year — and it’s not clear whether this surge in price is sustainable. For example, Bitcoin’s price surged by almost $1,000 in just over a week at the beginning of December last year. This kind of price increase can lead to an unsustainable rally, and it’s likely that we’ll see a price correction at some point in the near future. Another risk is that central banks around the world are experimenting with a wide variety of financial technologies — and if one of these experiments goes wrong, it could have a big impact on the Bitcoin market. For example, the Chinese central bank has partnered with a major Bitcoin exchange to launch a central bank-supported financial product in the country. If this product becomes huge and popular, it could have a big impact on the Bitcoin market.
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Scams and Frauds
Investing in cryptocurrency is not for the faint of heart — and there are plenty of potential scams and fraudulent ventures in the space. With any new investment opportunity, it’s important to do your research first and look out for red flags when investing in crypto. One of the biggest red flags that you should look out for when investing in cryptocurrencies is fraud. The crypto space is still relatively new, and there are a lot of bad actors that could try to take advantage of new investors. It’s important to know how to spot a scam or a fraudulent venture. First, make sure that you always invest money that you can afford to lose — money that you don’t need for daily expenses such as food and rent. Second, make sure you always research the venture first. Third, don’t ever invest in a venture that doesn’t have a product or a service that you can use — and make sure that the venture actually generates revenue.
Limited Use Cases
Another risk that you need to be aware of when investing in cryptocurrencies is the limited use cases of these assets. Bitcoin and most other digital currencies are primarily used as an investment vehicle — and they are not used as a payment system in any major way. There are a few businesses that accept Bitcoin as payment, but they are relatively rare. On top of that, most businesses that accept Bitcoin as payment have to convert the cryptocurrency back to fiat money at the end of the transaction. Due to these limitations, it’s not clear whether Bitcoin and other cryptocurrencies can ever become a mainstream payment system. There are some ventures in this space, such as BitPay, that are trying to make crypto payments more mainstream, but it’s not clear whether these ventures will succeed.
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High Volatility in Crypto Market
Cryptocurrency markets are highly volatile — and it’s not clear whether this volatility will subside in the near future. The Bitcoin price spiked as high as $7,823.09 on Friday afternoon, but it quickly dropped back down to $6,827.20 — setting a new all-time low for the day. The price of Bitcoin has been extremely volatile over the past few months, and it’s not clear whether this volatility will subside any time soon. One notable negative factor that has contributed to the extreme volatility of the crypto market is the FUD that has been circulating in the markets lately. For example, the SEC has been trying to clarify its stance on cryptocurrencies, but the SEC chairman has been circulating some negative FUD in the markets.
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Lack of Liquidity
The next risk that you need to be aware of when investing in cryptocurrencies is the lack of liquidity. The cryptocurrency market is relatively young, and there has been no standardized trading system in place for these assets. Most cryptocurrency exchanges are centralized, and they don’t provide users with any liquidity. This means that most investors in the cryptocurrency markets are only interested in short-term trading. As a result of the lack of liquidity, many cryptocurrency investors have been conducting naked short trades in the markets. What this means is that investors are selling Bitcoin without holding the asset themselves — and they are buying Bitcoin with the expectation of selling it at a higher price in the near future. There are a few exchanges in the world that provide active investors with a certain level of liquidity — but most cryptocurrency exchanges are centralized and lack any liquidity. This lack of liquidity poses a major risk to investors, and it could cause the prices of many digital assets to plummet in the near future.
Regulations Being Finalized or Proposed
Another risk that you need to be aware of when investing in cryptocurrencies is the lack of regulation in the space. The cryptocurrency market is relatively young, and there has been no standardized regulation in place for these assets. The majority of cryptocurrency exchanges are centralized, and they don’t provide users with any regulation. This could pose a serious risk to investors and could cause some of these exchanges to go out of business in the near future. There are some initiatives in this space, such as Bakkt, that are trying to provide more regulation in the space — but it’s not clear whether these ventures will succeed.
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Bottom Line
Investing in cryptocurrencies is extremely risky, and there are plenty of risks associated with the investment. One of the biggest risks that you need to be aware of is the limited use cases of these assets — which means that no major financial institutions are using them to process payments. Another risk that you need to be aware of when investing in cryptocurrencies is the high volatility in the price of these assets — which means that the price could plummet at any time. The last risk that you need is the lack of liquidity in the cryptocurrency market — which means that these exchanges lack regulation and could go out of business at any time.
