As more cryptocurrencies are hitting the market every single day, it is becoming more and more difficult for amateur investors to decide where to put their money. But, cryptocurrencies are not for everyone. Those who invest in them completely understand the kind of risk they are taking.
That is why there is still a very small percentage of people who put any kind of money into cryptocurrencies, established or new. So what is this “risk” exactly?
Here are the 7 top concerns that are keeping investors away from the cryptocurrency market.
Very High Volatility
This is the one factor that plagues the cryptocurrency market and the biggest reason why investors stay clear of cryptocurrencies. To study any kind of investments, there has to be an ecosystem. There are a series of fundamentals that experts rely on to predict the future movements of those investments. However, in the case of cryptocurrencies, there is nothing to study.
It is all the dance of demand and supply that drives the prices of cryptocurrencies up or down. This means that as more and more people enter the market to take advantage of the lucrative investment, the more the prices will go up. The more prices will go up, the more the bubble will grow in size.
And the more the bubble grows in size, the riskier it gets to invest. Because when the bubble will burst, it will take away all the investor money with it.
No asset backing it
What does bitcoin derive its value from? What makes Litecoin so valuable? Why is Ethereum trading at the price it is? The answer to all of these questions is just one – Speculation. The staunch supporters of cryptocurrencies counter this by saying that all stock markets work on speculation. It is true. But, they do not work only on speculation, there are real assets underlying those stocks.
Let’s understand it this way. Let’s say a person invests in the Amazon stock. Of course, the prices of the stocks are going to be affected by speculation as to how Amazon is going to fair in the future and what its potential is.
But, this analysis will be based on some hard facts. Amazon has a CEO, who has proved himself as a leader and his potential to drive profits. Amazon is also an incorporated company, which has tangible assets and a balance sheet that shows profits.
The things is that the staff, the projects, the services and the products offered by Amazon are all real. The stocks of Amazon derive their value from all these factors, and more. Speculation is just one of these factors and not just the only factor.
Whatever trades in the market derives its value from an underlying asset. Let’s say investors putting their money in gold bonds know that the price of their investment will be determined by a real tangible precious metal like gold. It has a certain inherent value, which goes up and down depending on how much of gold is available in the market, and also how much of the precious metal is in demand.
Fast forward to the cryptocurrencies, and the underlying assets just disappear. This is a very big reason why any big company worth its salt will never invest in these cryptocurrencies. They cannot predict the currency because it is only the demand driving the prices. The minute the bullish sentiment goes away, so will all the value.
Conflict of Experts
Cryptocurrency hit people like a shovel. Not so long ago, 10,000 bitcoins were used to buy a pizza. Today, 1 bitcoin is worth $15,000 and no one really knows where it will go from here. The point is that any serious investor always digs out all the available information about an opportunity before making any kind of investment.
While some of the big investors are backing bitcoins, Nobel Prize-winning economists are asking to ban it. Many experts are sure that there is a bubble in the making, and when it bursts, it is going to badly impact the financial markets all over the globe. On the other hand, there is another set of experts that believe that cryptocurrency are the only future going forward.
When such experts do not have enough information, a retail investor definitely doesn’t. And buying with the herd in the stock market without understanding an investment, never serves well.
No Customer Protection
Cryptocurrencies are having a free run in the market with such high volatility because there is no agency that regulates it. There is no government control or bank regulation that has laid down any kind of rules for the cryptocurrency market.
What happens when there is no regulator? A whole lot of frauds. When a credit card scam occurs, who does the victim report it to? To the bank. Why? Because the credit card is the bank’s responsibility. In a similar fashion, if you are buying a cryptocurrency and you get ripped off, who do you go and report to? No one.
Because there is no control over how cryptocurrencies should trade in the market, who can sell them, on any control over any of their activities in the market. With no form of regulation, investors are wary of putting away a huge amount of their hard-earned money into the cryptocurrencies.
While there is no designated authority in any country to regulate the cryptocurrencies, they are still being traded. The governments of all countries have one common sentiment – cryptocurrency craze could hurt their citizens. The volatility of the currencies can bring down the financial markets, and the whole economy with it. Some are more fearful of this happening than others.
Countries like China have completely banned currencies like Bitcoin. On the other hand, some countries have only issued advisories to their citizens to tread cautiously before investing into cryptocurrencies. This comes as a huge setback to retail customers. These investors may be trading in small amounts, but for them, it is their life savings. They cannot invest in something their Government is asking them not to.
On the top of that, all out bans will just shut down all of the corporate investors, and will hit retail investments badly as well.
Cryptocurrencies have become so famous because transactions done using blockchain technology are difficult to track. In fact, cryptocurrencies like Monero cannot be tracked at all. This promise of anonymity has made cryptocurrencies an absolute favorite in the black market and the darknet.
All kinds of criminals use these cryptocurrencies to fulfill their sinister motives. They can move money from one place to another without leaving a trace. This means that many cryptocurrencies are helping criminals buy and sell dangerous items like weapons, drugs, and more. In that context, for many investors buying cryptocurrencies becomes an ethical issue.
They do not want any part of a currency that makes it easier for the criminals to evade the law.
Scams Are Everywhere
With Bitcoin having one hell of a run in the market, the interest in cryptocurrencies has piqued. Many people think that they have missed the boat on potentially becoming a millionaire and they do not want to repeat their mistake.
So, what do they do? They are buying any and every cryptocoin hitting the market in the hope that it will be the next Bitcoin. But, in all this frenzy, they have forgotten to take the necessary steps to ascertain whether the coin is legit or not.
There are many scammers, you have introduced coins in the markets too. These developers just throw new coins in the cryptocurrency pool, wait for some customers to buy them, and drive the value up. As soon as they see any kind of value, they cash in their profits and then disappear.
In the case of established currencies like Bitcoin, many fraudulent exchanges have opened up too. All they do is fleece the customer. They take the money and the investor never receives the promised cryptocurrency.
Any new kind of investment comes with its own kind of pros and cons. However, in the case of cryptocurrencies, there is a whole new world that the investors have to first understand to make any kind of sense out of it. The market is in an upward spiral right now.
An investor is definitely attracted to a cryptocurrency, but the above concerns are stopping them from going forward. They are legitimate concerns. Governments across the world should come together to find a solution to address these concerns. When investors can feel safe investing in cryptocurrency, a whole new and healthy financial ecosystem will follow.