Kash here.
In Part 1 of Risky Bitcoin we looked at all the crypto wallet options, and how to pick the right one for you.
In Part 2 we looked at dastardly scams, and how to avoid them.
And in Part 3, The Final Risk Down (which is what you’re reading right now), we’re covering the risky leftovers… which are actually some of the most important things to be aware of.
They are…
?? Up and down risk
? Trust issues
? Not-a-nerd risk
Let’s get stuck in…
?? Up and down risk
What is this?
Up and down risk is my name for volatility risk. The simple fact that cryptos can go up and down in price.
Now, this is nothing new if you’re used to trading things like stocks, gold, or traditional currencies on the forex markets.
But cryptos are far more volatile.
Check out this chart…
The wiggly blue line is the volatility between Bitcoin and the U.S. dollar.
And the flat red line is the volatility between the U.S. dollar and the British pound.
I’d say it’s pretty obvious how much more up and down Bitcoin is!
On the one hand this is a very good thing because that volatility can send Bitcoin (and the rest of the crypto market) up a lot in value.
But on the other hand it also means the drops in value are more frequent and often steeper than other investments.
Couple this with the fact that countless studies show the majority of people can’t time when to get in and out of financial markets, and you have the potential to lose a lot of money.
What can I do about it?
- Hold you cryptos as a long term investment
- Don’t try and time the crypto markets (most people can’t)
- Enter and exit the markets with small chunks of money at a time, over a few weeks (this is called dollar cost averaging)
- Don’t invest money you can’t afford to lose
? Trust issues
What is this?
This phrase is popular in the crypto space…
“Not your keys, not your coins.”
The idea is pretty simple. If you leave your crypto with a third party, rather than in a crypto wallet you have control of, then in reality it’s their money, not yours.
That’s because crypto companies, like the exchange Coinbase, are not yet subjected to as rigorous regulation as traditional financial companies.
You need to be aware that, unlike with your bank, there is no Financial Services Compensation Scheme (FSCS) protecting your deposits. So, if Coinbase or another exchange goes bust, you would likely lose any crypto you have deposited with them.
This actually happened back in 2014 with the crypto exchange Mt. Gox. At the time, they were handling 7 out of every 10 Bitcoin transactions worldwide, then out of the blue they filed for bankruptcy.
Through theft, mismanagement, or fraud (it’s still unclear) they’d lost 850,000 of their customers’ bitcoins.
At the time that was worth $450 million, bad enough, but at today’s values that’s $37 billion!
Many crpyro companies now hold reserves of dollars, crypto, or even gold, to back their products. This offers some additional reassurance and security for investors, but only if these reserves are distributed between trusted third parties, so there’s no centralised risk.
And only if they’re audited by trusted third parties too, so you’re not just relying on one company’s word that their vaults are full of riches.
What can I do about it?
- Keep your crypto in a wallet you have control over not on exchanges
- Check if companies are audited by trusted third parties
- Check if they hold their reserves with multiple trusted third parties
- Don’t invest money you can’t afford to lose (again!)
? Not-a-nerd risk
What is this?
If you’re not a nerd, or you’re a bit of a technophobe, then you may struggle with some technology risk too.
You don’t need to be the next Bill Gates, but it is good to have a basic understanding of how this new crypto tech works.
For example, getting to grips with how your crypto hardware wallet works, and what the difference between a private key and a public key is.
Understanding that will mean you never give someone your private key instead of your public one, accidentally handing them access to your crypto funds.
Another thing to understand is the tech behind the crypto projects your investing in.
For example, does the coin you are investing in have a functional product that’s already being used in the real world?
It’s easy enough for a group of tech-savvy people to launch a coin with no working product behind it and then cash out with your money before they’ve delivered anything.
If you read up on the tech behind any crypto project it will become obvious whether it’s a pipe dream or an established project that’s already solving a problem.
Finally, some of the crypto money making options beyond “buy and hold” can be a little complicated.
Over time they’ll get more accessible, but right now the technical know how you need to, say, send money to a decentralised liquidity pool is quite high.
Stick to what you know, until you know more!
What can I do about it?
- Buy a hardware wallet and learn how to use it
- Only invest in cryptos that already have a usable product
- Don’t venture into more exotic crypto money making options until you understand them
- Don’t invest money you can’t afford to lose (again, again!)
Oh yeah, and also…
Remember to pay your taxes!
Check this Gov UK page for up to date tax rules for cryptos.
Well, there you have it.
Along with the wallets and scams guides, that’s the major risks of investing in crypto that you need to be aware of.
While it can be a bit of a boring subject I hope I broke it down for you in an easy to understand way.
Of course, if you have any questions about crypto risks, or crypto in general…
Simply email your questions to clients@thebetchat.com, and I’ll make sure I cover them in the days and weeks to come.
