Risks of Crypto Investing 2024
Crypto investing in 2024 remains risky due to market volatility, uncertain regulation, and the ongoing threat of cyberattacks and scams. As with any investment, thorough research and caution are essential before making any decisions.
Table of Contents
Volatility
Cryptocurrencies are highly volatile, meaning their value can fluctuate rapidly and unpredictably. This volatility can lead to significant gains or losses within a short period. An example of volatility in the cryptocurrency market is the significant price swings of Bitcoin. For instance, in December 2017, Bitcoin's price reached an all-time high of nearly $20,000, but then fell by more than 80% to around $3,000 by December 2018. Similarly, in 2021, Bitcoin's price reached a high of over $60,000 in April but then fell by more than 50% to around $30,000 by July. These fluctuations can make it difficult for investors to predict the future value of cryptocurrencies, and it's important to keep in mind that past performance does not guarantee future results.
Regulation
The regulatory environment surrounding cryptocurrencies is still uncertain in many countries. Governments can introduce laws and regulations that could affect the price of cryptocurrencies or limit their use. An example of uncertain regulation in the cryptocurrency market is the differing attitudes and approaches towards cryptocurrencies by governments around the world. For instance, some countries have been relatively friendly to cryptocurrencies, such as Japan, which recognized Bitcoin as a legal form of payment in 2017. In contrast, other countries, such as China, have banned initial coin offerings (ICOs) and restricted cryptocurrency trading activities. The regulatory environment in the United States is also complex and has been subject to ongoing debate and discussion, with various federal and state agencies taking different positions on cryptocurrencies' legal status and regulation. This uncertainty can lead to investors being uncertain about the future of cryptocurrencies in certain jurisdictions and how any potential regulatory changes might affect their investments.
Crypto Taxation
In India, one of the challenges with crypto taxation is the lack of clear guidelines from the government. While cryptocurrency is not illegal in India, the government is yet to bring the crypto bill. The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was introduced in the Lok Sabha. The bill was supposed to create a favourable framework for cryptocurrencies which will be regulated by the Reserve Bank Of India (RBI). The Cryptocurrency Bill was scheduled in the year 2021, in the Winter Session of the Parliament but it didn’t happen and there is no indication when it might see the light. As a result, there is uncertainty among investors and cryptocurrency exchanges about how to comply with tax laws.
The reluctance from Government side could be due to the difficulty in tracking transactions on the blockchain, which can make it challenging for tax authorities to monitor cryptocurrency trades and identify potential tax evaders. This makes it difficult for the Indian Government to accurately assess the tax liability of individuals and businesses that deal with cryptocurrency.
Some investors have received tax notices for cryptocurrency trades especially those who traded on Coinsecure crypto exchange in FY 2016-17, and many others still don't report their crypto gains.
Overall, the lack of clear guidance and procedures on cryptocurrency taxation in India poses a significant challenge for investors and exchanges, as well as for tax authorities.
Cybersecurity
Cryptocurrency exchanges and wallets are often targeted by hackers seeking to steal users' funds. If your wallet or exchange is compromised, you may lose your cryptocurrency. One example of cryptocurrency exchange hacking occurred in January 2018 when Japanese cryptocurrency exchange, Coincheck, was hacked, resulting in the theft of 523 million NEM coins, worth approximately $530 million at the time. The hack was caused by a vulnerability in Coincheck's security system, which allowed hackers to gain unauthorized access to the exchange's hot wallet. This incident is one of the largest cryptocurrency thefts in history and highlights the importance of securing cryptocurrency exchanges and wallets. It also serves as a reminder to investors to be cautious when choosing a cryptocurrency exchange or wallet and to store their digital assets in a secure manner.
Liquidity
Some cryptocurrencies may have low trading volume, making it difficult to buy or sell them at a fair price. An example of liquidity issues in cryptocurrencies is the case of some smaller altcoins with low trading volumes, which can make it challenging to buy or sell them at a fair price. For instance, a trader looking to sell a large amount of a low-volume altcoin may have to sell it at a lower price to find a buyer, which can result in significant losses. Additionally, liquidity issues can also cause significant price fluctuations in smaller cryptocurrencies, as even a relatively small buy or sell order can affect the price due to the low trading volume. This highlights the importance of considering liquidity when selecting which cryptocurrencies to invest in and being aware of the potential risks associated with low-volume altcoins.
Cryptocurrencies are often associated with scams and fraud, and investors can fall victim to Ponzi schemes, fake ICOs, and other fraudulent activities. One example of a Ponzi scheme in the cryptocurrency market is the case of Bitconnect, a cryptocurrency lending and exchange platform that collapsed in January 2018. Bitconnect promised high returns on investments made in its proprietary cryptocurrency, BCC, and encouraged investors to recruit others to the platform in exchange for referral bonuses. However, the company's business model was unsustainable, and it was revealed to be a Ponzi scheme, with the founders accused of defrauding investors of over $2.6 billion. The collapse of Bitconnect highlights the importance of conducting due diligence and being cautious of high-return investment opportunities that sound too good to be true, particularly in the cryptocurrency market, which is unregulated and subject to scams and fraudulent activities.
Market Manipulation
As cryptocurrencies are often traded in unregulated markets, it is easier for some individuals or groups to manipulate their price through various strategies such as "pump and dump" schemes. In a pump and dump scheme, a group of investors coordinate to buy a low-volume cryptocurrency, artificially inflating its price, and then sell it to unsuspecting investors at a higher price before the price drops again. This practice can result in significant losses for investors who buy the cryptocurrency at the inflated price, and the perpetrators of the scheme can make substantial profits. Another example of market manipulation is "wash trading," where a trader artificially inflates trading volume to create the impression of increased demand, which can also lead to misleading market signals and price movements. These practices are illegal and can be difficult to detect, highlighting the importance of conducting thorough research and using caution when investing in cryptocurrencies.
Forks and Bugs
Cryptocurrencies can experience forks which can result in the creation of new currencies, which could potentially lead to confusion and uncertainty for investors. Additionally, bugs in the code of cryptocurrencies can result in significant losses for investors. You may have heard about the case of Bitcoin Cash (BCH) and Bitcoin SV (BSV). Both BCH and BSV resulted from a fork of the original Bitcoin blockchain in 2017 and 2018, respectively. Investors who held Bitcoin before the forks received an equivalent amount of BCH and BSV, but the value of these new cryptocurrencies was significantly lower than that of Bitcoin. As a result, investors who did not sell their BCH or BSV holdings suffered a loss in value. This highlights the importance of understanding the potential impact of forks on cryptocurrency investments and being aware of the risks involved. It also serves as a reminder to keep up-to-date with the latest developments in the cryptocurrency market and to adjust investment strategies accordingly.
An example of loss in cryptocurrency due to bugs is the case of the DAO hack in 2016, which resulted in the loss of approximately $60 million worth of Ether (ETH) at the time. The DAO (Decentralized Autonomous Organization) was a smart contract-based investment fund built on the Ethereum blockchain. A vulnerability in the DAO's code allowed a hacker to exploit the system and transfer a large amount of ETH to their own account. This incident highlighted the risks associated with smart contract-based systems and the importance of thoroughly auditing code before deploying it. Investors who held DAO tokens suffered a significant loss, as the value of the tokens plummeted following the hack.
Low Adoption of cryptocurrencies
The adoption of cryptocurrencies is still relatively low compared to traditional currencies, and widespread adoption is necessary for them to become a stable and reliable form of investment.
It's important to do thorough research and seek professional financial advice before investing in cryptocurrencies.
The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that we are not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. CA Mitesh and Associates is Mumbai's leading Cryptocurrency Taxation Firm which is committed to helping people navigate complex tax laws and banking regulations. Our main aim is to assist the individuals with applicable laws & regulations compliance and providing support at each & every level to make sure that they stay compliant and grow continuously. For any query, help or feedback you may get in touch here - Appointment with CA. Please note the all consultations with the CA are Paid consultations. Financial Year 2024.
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