Is it a risky investment into cryptocurrency? What are the risks and rewards of crypto investment?

This cryptocurrency has been the new hot topic in finance circles over the last ten years. However, with its meteoric rise has been accompanied by growing debates on the risks of putting their money into digital assets. So is cryptocurrency high risk? Well, the short answer is, yes, crypto can be highly volatile and speculative. However, the magnitude of the risk depends on factors known to most gamblers: market knowledge, investment strategy, and risk tolerance.

Now, let’s understand the key risks involved with this investment in cryptocurrency and how intelligent investors should mitigate them.

Why is Cryptocurrency Considered High Risk?

Volatility
One of the defining characteristic features of cryptos is that they are highly volatile. There can be sudden price variations within a short time frame and the value of tokens like Bitcoin and Ethereum oscillating in thousands. Such volatility can be associated with market speculation, regulatory news, or even social media sentiments. As such, crypto is intrinsically risky compared to more traditional assets such as stocks or bonds.

No Regulation
Unlike the old system of financial markets, cryptocurrency operates in a largely unregulated space. A few countries have begun imposing regulations, but at the global level, there is still no consistency in cryptocurrency governance. This dearth of transparency in governance could allow fraudsters, hackers, and manipulators a field day in using this medium for wrongdoings.
Related reading: How Crypto Regulation Impacts Markets

Market Speculation
While stocks are controlled by the underlying fundamentals of earnings and revenue, cryptocurrency prices are mostly driven by speculation. This makes it even more speculative and tends to fluctuate wildly depending upon the hype, fear of losing out (FOMO), or panic selling, which further adds to the risk.

Security and Hacking Risks
Even though blockchain is the safest technology, flaws in the platforms and exchanges trading cryptocurrencies are open to hacking. Several cases have been witnessed whereby exchange hacks, including the infamous Mt. Gox hack, have resulted in stealing billions of dollars from investors.

Lack of Consumer Protection
In the event a traditional investment platform collapses, there are probable government-backed protections or insurances, for instance: the Federal Deposit Insurance Corporation (FDIC) within the United States. Within cryptocurrency, however, if a platform goes down or an investor is targeted by some form of scam, there is little recourse to recover lost funds.

Potential Benefits Of Investing In Cryptocurrencies
However, some huge rewards exist for those brave souls who may wish to venture into this sea of uncertainty. Simply because of its volatility, some enormous returns can be made on investments due to high volatility when the market is timed appropriately. Even early Bitcoin adopters have seen extraordinary returns over the years.

Diversification
Cryptocurrencies offer alternatives to traditional financial instruments and help investors diversify their portfolios. Crypto helps diversify reliance on conventional markets.

Attractive High Returns
The cryptocurrency is attractive to risk seekers, in that it holds both the possibilities of high returns and a high risk. Many of the early investors in Bitcoin made returns measured in thousands of percentage points, which is important to remember: such returns are rare and cannot be forecasted.

Availability
Unlike some traditional assets, cryptocurrencies can be traded 24/7 from any corner of the globe, a level of convenience that far surpasses what has ever been experienced in traditional financial markets. This also attracts a wide variety of traders and investors.

Read more: Why Crypto is Revolutionizing Financial Markets

How to Mitigate Risks When Investing in Cryptocurrency
But if you have still decided to invest in crypto, then knowing what risks are involved is as important as knowing how to mitigate them. A few strategies that help you manage the dangers of crypto investing are as follows:

Diversify Your Portfolio
Don’t put all your eggs in one basket. By spreading your investments across multiple asset classes, including both crypto and traditional investments such as stocks or bonds, you may minimize the impact that cryptocurrency volatility will have on your overall portfolio.

Invest Only What You Can Afford to Lose
Since cryptocurrencies can be speculative, you should only invest the amount that you can afford to lose. In fact, experts often caution those with high-risk assets such as crypto assets to limit their allocation to a small fraction of their total portfolio.

Keep Your Crypto Assets in Secure Wallets and Use Reputable Exchanges
Be sure to keep your crypto assets in secure wallets and use reputable exchanges when buying or selling. Hardware wallets offer a security feature that online exchanges cannot.

Related reading: Best Crypto Wallets for Safe Trading

Stay Informed
The crypto market is rather volatile. The more that you know about the latest news, shifts in regulation, and technological breakthroughs, the better your decision-making will be. Watch for accurate sources and follow the discussions of the cryptocurrency community.

Conclusion: Balancing Costs and Benefits
By no means, are cryptocurrencies a risk-free investment, yet volatility is extreme, regulated almost totally absent, and hacking is easy. For those who are willing to take the risks, the payoffs can be immense, but only if properly informed, securing assets safely, and making the right investment.

Understanding risks and rewards will prepare everyone, whether an experienced investor or a novice, to face the volatile world of cryptocurrency.