Cryptocurrencies have become a more and more attractive investment target for a growing number of Finns. With them, however, you should keep a cool head and be aware of the risks associated with investing.
When investing in cryptos, you should keep a cool head. Adobe Stock / AOP
Department of Finance at the University of Vaasa in the dissertation Niranjan Sapkota has gone through the risks of investing in cryptocurrencies, which he identified 13 different. One of the biggest risks is cryptocurrency insolvency.
– More than 12,000, or more than 60 percent, of cryptocurrencies have gone bankrupt or completely disappeared since the most famous cryptocurrency, Bitcoin, was born in 2009. Some of the currencies are still on the verge of collapse, says Sapkota
Other risks include sustainability risk, currency privacy-related isolation risk, sentiment risk, speculation-related risk, stability-related risk, fraud-related risk, security-related risk, storage-related risk, scalability-related risk, education level, societal risks, and systemic risks related to regulation.
Green or dirty?
The university’s press release explains how, based on the results of the doctoral research, cryptocurrency bankruptcies are predictable.
– For example, you can watch out for a cryptocurrency whose first day on the market has been strong, but the first month’s return has been moderate. Also avoid currencies with unknown founders, lots of pre-mined coins and relatively high mining fees per block, says Sapkota.
The dissertation also highlights the greenness of cryptocurrencies, which has been much exposed. According to Sapkota, cryptocurrency can be green, i.e. environmentally friendly, or dirty, i.e. polluting.
– A cryptocurrency like Bitcoin is considered dirty because it uses a huge amount of electricity to verify and record transactions on its public blockchain. For example, one Bitcoin store consumes as much electricity as the average household in the United States over a period of more than 20 days. Instead, for example, Ethereum, the world’s second most popular crypto, has switched to the proof-of-stake method for verifying transfers. This has reduced energy consumption by 99 percent, Sapkota says, referring to the recent “merge” of Ethereum.
However, according to the dissertation research results, energy consumption does not affect the pricing of cryptocurrencies, but trust in cryptocurrencies is more important.
Under dirty cryptocurrencies, Sapkota also includes cryptos that are used for criminal activities. This is how environmentally friendly crypto can also be dirty.
The market is driven by mood
The release explains how various hacks, crypto collapses, scams, regulations and taxes have been on display for a long time when talking about Bitcoin, which is the world’s largest cryptocurrency. According to the press release, Bitcoin has already been declared dead many times in the media.
At the same time, the individual cases have increased the desirability of Bitcoin, although in the next moment the situation may be completely different.
– On the other hand, news such as Tesla’s announcement of $1.5 billion in Bitcoin purchases has also increased Bitcoin hype. However, the mood of the market changed when the company’s CEO Elon Musk removed Bitcoin as a payment option from Tesla’s website, saying it poses an energy, environmental and sustainability risk, Sapkota says.
According to Sapkota’s research, the market is largely driven by the mood conveyed to the media by optimistic investors. This sentiment drives the price of Bitcoin.
According to Sapkota, when it comes to cryptocurrencies, emotions should never prevail over intellect.
– Investors who have a fear of risk, change, problem regulation or loss easily fall into the fear of fraudsters and lose their money.
Sapkota is worried about the lack of education, because although many people use the internet, only a few use cryptocurrencies. In addition, there are risks associated with storing cryptos in digital wallets, and using a third-party service or storing them yourself is not completely safe.
Every investor must be careful with scams.
– Just like traditional securities and currency markets, new digital financial markets also involve risks such as speculation, fraud, money laundering and hacking, says Sapkota.