Risks of investing in Cryptocurrency
Cryptocurrency exchanges, more so than stock exchanges, are vulnerable to being hacked and becoming targets of other criminal activity. Security breaches have led to sizable losses for investors who have had their digital currencies stolen, spurring many exchanges and third-party insurers to begin offering protection against hacks.
Safely storing cryptocurrencies is also more difficult than owning stocks or bonds. Cryptocurrency exchanges such as Coinbase (COIN 1.77%) make it fairly easy to buy and sell crypto assets such as Bitcoin (BTC 5.56%) and Ethereum (ETH 5.87%), but many people don't like to keep their digital assets on exchanges due to the risks of allowing any company to control access to their assets.
Storing cryptocurrency on a centralized exchange means you don't have full control over your assets. An exchange could freeze your assets based on a government request, or the exchange could go bankrupt and you'd have no recourse to recover your money.
Some cryptocurrency owners prefer offline "cold storage" options such as hardware wallets, but cold storage comes with its own set of challenges. The biggest is the risk of losing your private key; without a key, it's impossible to access your cryptocurrency.
There's also no guarantee that a crypto project you invest in will succeed. Competition is fierce among thousands of blockchain projects, and many projects are no more than scams. Only a small percentage of cryptocurrency projects will ultimately flourish.
Regulators may also crack down on the entire crypto industry, especially if governments view cryptocurrencies as a threat rather than an innovative technology.
The cutting-edge technology elements of cryptocurrency also increase the risks for investors. Much of the tech is still being developed and is not yet extensively proven in real-world scenarios.
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