Investment risksLast revision: Aug 25, 2017
Fundamentally investing in cryptocurrencies has these risks:
One or more off the currencies may significantly decrease in value or even go to zero
This is the most likely investment risk, because there is a very good chance that in 5 year period at least one of the recommended portfolio currencies will significantly decrease in value or even go bust. However, one must also take into account that at least one of recommended portfolio currencies are very likely to exponentially increase in value. The primary reasons a cryptocurrency may significantly decrease in value or go bust could be:
- poor adoption,
- stronger competitors,
- technical flaws,
- various attacks,
- regulation from authorities,
- bad core team,
Loss of the currencies during the holding period
Another strong risk is the holding risk, though this can be controlled or even prevented. Since the currencies are kept on computers they are susceptible to hacking, especially if computers have internet connection or even more so if computers have internet connection and/or are infested with malware. We prevent this risk by using cold storage solutions, enforcing 48 hour delay to withdraw currencies and using various monitoring tools. This is only a partial measure of protection, because the client is also responsible for maintaining their credentials and monitoring their messages so that they do not lose their funds. The best way to prevent this problem is by using 2nd factor authentication or other additional security methods. Other options may be using hardware wallets and for more tech savvy clients it could be building their own cold storage solutions. To have ultimate security we believe that having one “secure“ solution is not enough and we recommend diversifying how you hold your assets.
Legal restrictions for using or withdrawing currencies
Blockchain technology is disruptive and some groups of power cannot handle it in a reasonable way, so having legal restrictions and limitations is also a risk worth considering. One day, your country may announce that „Currency X“ is illegal and anyone who is caught using it will be prosecuted. For example bitcoin is currently banned in Ecuador. Another scenario may be that the most rapid growing crypto currencies get heavily taxed.
Other „Black Swan“ events
Black Swan is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. This theory was developed by Nassim Nicholas Taleb. As much as we know this is a low risk, but according to Taleb’s theory, in a Black Swan event is much more impactful based on what you do not know, as opposed to what you do. It is possible that a new or better way to transact or exchange information may evolve and all cryptocurrencies and digital money becomes irrelevant or some other unexpected scenario develops.