For the past years, cryptocurrencies have been making noise in the financial markets. People are touting that they will be the next big thing that will replace the current fiat system. It can’t be denied that some people have made a fortune trading these speculative instruments, but there are possibly more who have lost a lot of money for being ill-informed of the dangers involved in investing in cryptocurrencies.

What are Cryptocurrencies?

A cryptocurrency is a form of electric money represented by a digital token. The coins or tokens are created by a system that’s maintained using strings of data called a blockchain.

Cryptocurrencies are used by people not only as some sort of investment or alternative to fiat but also to execute contracts and run programs.

Cryptocurrencies and ICOs

Cryptocurrencies are usually introduced to the market through a process called Initial Coin Offering (ICO). Like in an IPO, participating in an ICO enables you to get your hands early on the digital tokens before they possibly increase in value. But market dynamics remain applicable to ICOs, so it’s up to the public to decide the value of a token or its underlying technology.

ICOs are made to raise money and public awareness regarding a product or technology. But unlike IPOs, no law can cover your investment in an ICO or any cryptocurrency. Oftentimes, there’s also no physical business that represents the group releasing ICO statements and all you get is a white paper explaining the concept that runs the cryptocurrency.

The most popular cryptocurrencies today are Bitcoin, Litecoin, Ripple, Ethereum, Stellar, and IOTA. There are thousands of other cryptocurrencies available in trading platforms, but not all of them are worth looking into. While some may provide profitable opportunities, many of them are high-risk instruments that you should be wary of.

Risks of Buying Cryptocurrencies

Being a highly speculative financial instrument, you should educate yourself on the risks involved in buying digital tokens online. Here are the major factors to consider before you start investing or trading them.

1)      Unregulated platforms

The platforms where you trade digital tokens aren’t regulated by the government. Unlike the ASX where there’s a strict process for approving companies wanting to be listed, there’s no such body to monitor cryptocurrency trading platforms and ICOs.

2)      High volatility

Since there’s no established company or physical representation of the cryptocurrency’s value, the price of the tokens is highly volatile and can fluctuate significantly within a short time. The value of the cryptocurrency will mainly depend on its popularity, the underlying technology, the ease of trading it, and its perceived future performance.

Digital tokens are also not recognised as legal tender, so you have no way of insuring your investments in them.

3)      Fraudulent ICOs

Social media is a popular tool that scammers use to hype the value of an ICO token. Insiders can falsely inflate prices and then dump their shares onto unknowing buyers who believed their promotions.

ICOs are hard to monitor because they can be done online and can originate from anywhere in the world. The ASIC has released a guideline on how to spot dubious ICO statements, so use this as a reference to avoid getting scammed by too-good-to-be-true investments.

4)      Possibility of getting hacked

Although cryptocurrency platforms boast how secure and tamper-proof their blockchain and digital wallet securities are, they can still be hacked and tampered with. And since digital tokens are unregulated, you’ll have little chance of recovering stolen digital tokens. You’ll also have no legal protection against unauthorised transactions from your wallet.

Conclusion

Cryptocurrencies provide opportunities to those who know what they’re getting into. Since they are highly speculative, they carry more risks than rewards, especially to those who lack the knowledge on the nature of the value of digital tokens.

The Australian government has sent out warnings on investing in any kind of cryptocurrency, no matter how established and popular these systems may be. It’s best to seek this financial vehicle with caution and not forget about putting risk management in place.