12 Cryptocurrency Portfolio Risks & Disasters To Avoid For Protection
With the announcement that the combined value of all cryptocurrencies this year could surpass 1 trillion dollars, it’s understandable that investing in these coins could be considered a lucrative venture. Almost daily one can read news about the price of Bitcoin surging upwards, or that some lucky investor made millions of dollars by getting in early. But what people often don’t think about are the things that could wipe out their portfolios entirely, with some being totally out of their control.
So let’s examine the top risks and disasters that could be befall your portfolio so you can prepare if the worst happens.
1. Phishing Scams And Spoofed Payment Credentials
Let’s begin with the common problem of theft. For example, imagine you are transferring some coins to one of your friends. You copy down his wallet address, but then some hidden malware on your computer replaces the address at the last second you press send. Not every person is aware enough to double check each address, especially since they are long strings of random characters.
A different example is a phishing scam. An attacker could easily clone the website of a popular exchange or wallet service and capture the user’s passwords. Unlike traditional banking that has controls and insurance to protect their customers funds, cryptocurrencies do not. And banks can usually cancel a fraudulent transfer before it’s too late, but this is not the case with virtual tokens.
2. Hacked Payment Gateway
In addition to phishing scams and malware, a compromised payment gateway could lead to investors losing their portfolios, and has happened before. In June last year, a popular wallet service called Ethereum classic started to siphon funds from its customers wallets. Hackers had managed to deceive the hosting provider that they were the actual domain owners, and injected code that intercepted transactions.
Fortunately, the hackers made a critical mistake of moving too quickly and blew their cover. The thieves managed to steal $300,000 over a few hours. The damage could have been far worse if they had waited longer.
Banks also suffer the same complications as wallet services and exchanges when it comes to security, and there are several examples of hackers that managed to hijack an entire bank.
3. User Address Error
The above examples were the result of what happens when the real world, criminals, and electronic money interact. But there are some specific weaknesses that cryptocurrencies have that make that much more vulnerable. For example, one error that users can make when transferring funds is typing the address wrong, or sending money to a different address altogether.
When Ethereum users input everything except the last character of an address, the entire sum could vanish forever. Otherwise, it would sent to the intended recipient, but the amount would double by a factor of 256.
One good thing that Bitcoin has over Ethereum is its native address validation that checks if an address is live or not. However, this still does not prevent users from making a typo and losing a large sum of money. Some investors have lost as much as 800 Bitcoins, which is around $3.6 million dollars by pushing the wrong key.
4. Loss Of A Wallet File
Another risk to crypto users is if they lose their wallet. Not a physical wallet where you store your cash, but a file that sits on your computer. Most people store their wallet file, which is needed to access one’s account, on their computers. This then makes these files a lucrative target for criminals or malware, as well as a disaster if your hard disk crashes.
The problem of losing the wallet file can be preempted by making several backups of their secret keys, or through the purchase of a USB wallet. Cold wallet storage is typically reserved for only the richest of investors, so this number of investors remains small.
Compared to decentralized money, the traditional banking system’s security is much better at the present. It would hard to find an institution that does not employ security measures to keep their customers safe. Things like two-factor authentication and one-time passwords go a long way to keeping the banks out of legal trouble, too.
5. Fraudulent ICOs
In 2017, ICOs exploded on the investment market. It was the year that blockchain and cryptocurrencies entered the mainstream consciousness; a new method of fundraising was realized. Using cryptocurrencies has allowed startup founders to acquire masses of funding with little more than an Internet connection. $1.7 billion dollars was raised by ICOs in 2017. The success of these ventures were patchy at best, yet investors and even large corporations remain optimistic.
The troubles with ICOs is the market is wholly unregulated, paying homage to the decentralized nature of the Ethereum blockchain There are no guarantees, or ways for investors to get an assessment for how much risk they are exposing themselves to. The only steps people can take is to look at an ICO’s potential and the credentials of its executives, and trust that the venture will pay out.
Just like in the real world, most ventures of the cryptographic sort don’t pan out in reality. Just because something sounds like a good idea doesn’t mean it is feasible, not to mention the character of the founder himself. The owner could decide to simply make off with the proceeds of the ICO and leave investors penniless. Laundering money taken from these startup rounds is made easier thanks to anonymity of cryptocurrencies.
6. Fake User Address
Besides larceny and fraud, some attempts at taking people’s money are simply a crude bait and switch. When an ICO launches for the first time, a public address is posted on the startup’s website for investors to send money to, which then opens a vulnerability that can be exploited. In one case, an intruder accessed an ICO’s website during its fundraising period. The hacker switched the company’s address to his own. Within 2 hours, he had stolen more than $8 million dollars from investors. The company even warned people the address was fake, but to no avail. Investors continued to send money to the hacker’s address, and the intruder made an extra $2 million dollars.
7. The Bitcoin Blockchain Loses Its Attraction
Like all other digital assets, the value of Bitcoin and its derivatives lies with its design: the blockchain. In the middle of 2017, a soft fork was implemented that split Bitcoin in two, namely Bitcoin and Bitcoin Cash (BCH). This upgrade moved resources from its original inception to improve the network’s capacity and transactions speeds, reduce fees, and to speed up the technology’s rate of adoption.
But think what would happen if the blockchain fails to entice new businesses? At the present, there are over 150 companies that are working with the Ethereum blockchain and smart contracts. These contracts help verify and negotiate every transaction made, which is sharp distinction from the Bitcoin network. If more people choose to utilize a platform like Ethereum over Bitcoin, then its price could tumble.
8. Large Businesses Stop Accepting Cryptocurrencies
Over the past two years, household names began to accept Bitcoin and other coins as a form of payment. Some investors have seen the acceptance of these tokens as proof of their legitimacy in the market, and as a good reason to buy while they’re still cheap.
But this could lead to investor disillusionment. If Bitcoin keeps up with its trend of volatility, then there’s a strong possibility that companies could refuse to accept the virtual currency. One thing that hinders Bitcoin’s use as a form of payment is its lengthy settlement times, which means its value could plummet before it’s converted into a fiat currency.
Insufficient adoption for the virtual currencies including Bitcoin is another thing that could devastate an investor’s portfolio.
9. Regulatory Overkill
In a few ways, the regulatory landscape for cryptocurrencies was positive in 2017. For example, Japan began accepting the coins as a valid means of payment in March, while the CME Group announced it would start offering Bitcoin futures at the end of last year. These developments helped vindicate these coins as an investment instrument as well as form of tender.
However, things were not completely positive in 2017, either. In October, China and South Korea both banned initial coin offerings (ICOs), with China even going as far as prohibiting domestic exchanges. The actions on behalf of these governments and nations shows they play a crucial role in the health and longevity of the tokens, and as something that can help or harm each currency.
10. Cyber Assault Hits Bitfinex
Cyber attacks are nothing new in the world of cryptocurrencies and the have happened before. Only four years ago, Mt. Gox was handling more than 75% of the total Bitcoin trading volume, and was infiltrated by an ambitious hacker. Mt. Gox had to file for bankruptcy, and stated $6.9 billion dollars worth of coins were stolen, along with its cash-held assets. The market was slow to recover from this hack, as Bitcoin went on to lose more than 80% of its value before recovering.
Right now, we have a similar situation with Bitfinex. The exchange is responsible for processing approximately 50% of all transactions for Bitcoin. If Bitfinex were to become a target for a hack, it would destabilize the market and leave the virtual coins in a highly questionable state.
11. Margin Calls Destabilizes Currencies
With the CME Group’s proposal to begin listing Bitcoin futures for 2018, the optimism around Bitcoin couldn’t have been higher. This move was considered an extremely positive development for people who work on Wall Street, as well as for crypto enthusiasts. Bitcoin Futures would allow the financial sector to own a stake in Bitcoin, and without having to navigate through decentralized exchanges. Some welcomed this news as a sign it could help reduce the volatility of the currency. However, not all is what it seems, because there is an unexplored and real downside to the corporate world having a hand over Bitcoin.
The new futures trading will allow Wall St. to bet and hedge against Bitcoin for the first time in history. It will also allow people of any financial education to borrow on margin and enter those as short positions. This could be extremely risky, as Bitcoin is known for its volatility. The risk is that if Bitcoin were to swing violently up or down, this could cause a flood for margin calls that may destabilize the currency’s value. Unlike other form of investments, Bitcoin is the first of its kind, so there is no way to set a precedent or margin limit aside from pure speculation.
12. Investor’s Emotions Get The Better Of The Market
Something also needs to be said about the increasing amount of ambivalence about the future of bitcoin’s growth. Insufficient confidence in the market could cause the value of Bitcoin and other cryptocurrencies to plummet. Since its inception, investors have been largely responsible for controlling the coin’s value. In comparison to the investment firms on Wall Street, retail investors are far more emotional when it comes to decision making, which can lead them to make risky and uncalculated decisions.
Most of the wild swings of volatility for the price of Bitcoin and other cryptocurrencies was the result of investors making reactive decisions, either by panic buying or panic selling. It’s therefore reasonable to assume it wouldn’t take a lot for this sentiment to swing towards the negative, and cripple the cryptocurrency market.
12 Crypto Portfolio Risks & Disasters To Avoid Conclusion
So here are the 12 likely things to happen that can wipe one’s portfolio entirely of value. Some of these were in the individuals control, while others are global and beyond prediction. But whatever happens, there will always be something new on the horizon to put these virtual currencies in danger.