Investing in cryptoassets comes with a unique set of risks and challenges that everyone who invests in crypto should be aware of. The nature of - and uncertainty around - these risks mean that cryptoasset investments can suffer extreme price swings, and even drop down to zero in some cases.
For this reason, the UK’s FCA suggests that no more than 10% of your assets should be allocated to high-risk investments like crypto.
📉 Extreme market & price volatility
Cryptoassets are notorious for wild swings in price - both up AND down - within short periods of time. This may lead to potentially significant gains - or equally brutal losses. Amongst many other things, here are just a few reasons for this volatility.
The relatively small trading volumes (when compared to traditional markets like stocks and bonds).
A global, 24/7 market dynamic means that crypto markets are highly susceptible to contagion and massive crashes.
Concentration of assets in the hands of few players who can move the market significantly or commit fraud.
Sudden abandonment, failure, or lack of interest around a cryptoasset may mean there aren’t any buyers in the market, and investors are stuck with a worthless asset.
⛓️ Immature technology
Blockchain and other decentralized technologies that underlie cryptoassets are still relatively recent when compared to more mature financial infrastructure. The cutting-edge nature of the technology comes with inherent risks, such as:
Open-source development around a specific project may be abandoned or reach a dead end.
Bugs can be found that compromise applications, functionality, or funds.
Contentious upgrades may fragment and break apart the communities that underlie a project.
😮 Custodial and usability risks
Hosting and transacting safely with cryptoassets is still difficult for most everyday users. Here are just a few risks:
Self-hosting, where the user is responsible for keeping their assets safe, can be risky for many, as losing a wallet’s private keys means the assets are lost.
Third-party hosting, where users of a wallet have the same login and password recovery as most web2 platforms, carries the risk of counterparty failure, hacks, or outright fraud - since the third party is actually the controller of the deposited cryptoassets.
Transfers are usually irreversible, so if a user enters the wrong receiving address, there’s no recovering it.
The crypto space is particularly susceptible to cyber threats, hacks, and the exploit of tech/organizational vulnerabilities in crypto exchanges, decentralized platforms, and wallets.
⚖️ Regulatory uncertainty
The fast-moving and globally fragmented regulatory landscape can be a risk for investors. For example, residents of a country could wake up one day to find that their country has made cryptoassets illegal.
😨 Fraud and financial crime
The global nature of crypto, plus the inconsistent and fragmented regulatory landscape make crypto a particularly fertile ground for fraudsters and criminals.
The lack of regulations usually means that cryptoassets fall outside traditional financial protection recourse; for example, in the UK, the FCSC doesn’t apply to crypto, and investors can’t file a complaint with the Financial Ombudsman
Criminals can easily commit crimes against citizens of different countries, making cross border legal action or any kind of enforcement very difficult.