Crypto market is becoming more and more dangerous for investors: more and more frauds, hackers more often break into crypto exchanges, and some experts consider tokens a financial pyramid. Is it worth investing in bitcoin and cryptocurrency now and how to avoid possible risks?
Cryptocurrency buying risks
Over the past two years, the cryptocurrency market has seen an increase in fraud and the number of “dead” assets. The number of tokens that are not in circulation now stands at 2,400. According to The Street, that’s a 71% increase since February 2020.
Fraud incidents are also occurring more frequently. Attackers are taking advantage of the volatility of the crypto market and the low awareness of blockchain technology among young investors.
There are two most common methods of cryptocurrency fraud – hacking cryptocurrency wallets and exchanges, as well as creating a fraudulent token. In this case, the creators actively advertise the coin and end up cashing out all the funds invested in their project, leaving investors with nothing.
The main threat to the security of the cryptocurrency ecosystem remains social engineering, according to Vladimir Smerkis, director of the cryptocurrency exchange Binance in Russia.
“To increase the effectiveness of phishing, attackers collect information about their targets in the digital space and in the real world. The targets of attackers are private wallet keys, credentials and verification codes,” Smerkis explained.
He also noted that any investment is a risk, whether it’s traditional finance or cryptocurrencies, so it’s important to properly assess risks before deciding to invest.
“When it comes to cryptocurrency, it’s worth remembering that virtual luster is not really a sign of gold. Cryptocurrency is referred to by many as a revolution in currency, the future of investing and a breakthrough technology. But if you look beyond the hype, you find nothing more than a pyramid scheme pretending to be a currency,” says Vivaldi founder and CEO Jon Von Techner.
According to him, cryptocurrencies are a digital commodity without state support or support from the banking system.
“By claiming to be the new digital currency of the Internet, cryptocurrencies promise decentralization and freedom from governments. But because cryptocurrencies are too volatile to use as a real currency, people see them as a kind of investment scheme. The problem is that to extract real money from the system, you have to find someone willing to buy the tokens you own. And that’s only possible as long as they believe they can sell them to someone who will pay even more for them.
If at some point you stop finding people willing to buy those tokens just on the promise that they will be worth more in the future, the whole scheme could collapse and the value of all the tokens would drop to zero,” the expert says.
According to Jon Von Techner, there are more than 8,000 cryptocurrencies at the time of writing and it is still unclear whether there is any realistic scenario for cryptocurrencies or a reasonable way to value them.
“Without that, cryptocurrency becomes a very complicated slot machine for those with extra money,” the expert stressed.
In addition, he also stressed that cryptocurrency could lead to an environmental disaster.
“The energy costs of generating just one bitcoin are staggering – they are comparable to the consumption of electricity by some countries. For obvious reasons, such energy consumption is not good for the environment, as this energy could be spent on more sensible needs. At a time when many of us are struggling to reduce our carbon footprint, it seems counterproductive to indulge in technology that negates all that hard work,” explained Jon Von Techner.
The crypto market is no different from the currency market
BitRiver financial analyst Vladislav Antonov does not agree that the crypto market has become dangerous for investors.
“The crypto market is almost no different from the currency market. Risks exist on any exchange. It doesn’t matter what you trade or what you invest in. Money can be lost on any asset, including business,” he explained.
According to Antonov, to avoid risks you should take time to improve your financial literacy. This will allow you to choose a reliable exchange so it won’t get hacked, as well as make a trading plan for trading or future investments.
“It is because of the lack of a trading plan and lack of understanding of the market that many traders succumb to panic and lose money. Also, in trading, losses can be limited by a protective stop. Investing in cryptocurrencies is possible and even necessary. The main thing is to stick to the commandments for a trader, which you can easily find on the Internet,” Antonov explained.
Because cryptocurrency is a risky asset, the expert advises to invest only the amount that you are willing to lose. It is also not worth trading “on emotions.”
“Keep an eye on the news of regulators regarding the crypto industry and the external background. Cryptocurrency has a close connection to the U.S. stock market. Figure out the market, and it will thank you with profit,” Antonov concluded.
According to Aaron Chomsky, head of ICB Fund’s investment department, investing in cryptocurrency in 2022 is safer than a couple of years ago.
“Today we do not see an increase in fraudulent transactions in the cryptocurrency market. On the contrary, it is much safer to invest in it now than a year or two ago. First of all, this is due to the development of convenient infrastructure for every taste. It allows investors to work safely with intermediaries, which are under the scrutiny of regulators, and have too high income to just run away with money of clients. Of course, pyramids have their place, but it is worth understanding that they become popular precisely because of people’s financial illiteracy and are associated with cryptocurrencies only because of their popularity,” the expert believes.