🦾Risks associated with cryptocurrencies
Intangible, Illiquid, Uninsured – The true miracle of blockchain-based cryptocurrencies, such as bitcoin, is that the issue of double counting is resolved without any intermediary, such as a bank or banker. This feature captured by the notion of digital singularity, where there can only be one instance of an asset is powerful and one of the primary reasons this asset class has blossomed. However, the intangible and illiquid nature of cryptocurrencies (combined with the point above about narrow exits) hamper their convertibility and insurability.
Technological Risks – There have been many reports about the computational complexity and energy consumption of bitcoin mining, as some of the technological limitations of cryptocurrencies. This computational complexity may also work inversely and pose potential risks to the asset class under the premise that complex systems fail in complex ways.
From Extortion To Manipulation – While no investor should part ways with money they are not prepared to lose, no matter how nominal the amount, cryptocurrencies are particularly prone to social engineering and misinformation risks. The naïve, as with the analog economy, can become easy prey to cyber extortion, market manipulation, fraud and other investor risks.
Care, Custody And Control – Despite the intangible and unseen nature of cryptocurrencies and digital assets more generally, some of the biggest issues plaguing the market are care, custody and control. Like the perennial challenges of cyber and physical security of the traditional banking sector, there is a veritable standards war taking place among crypto custodians on who is providing the highest standards of investor protection and asset security. The number of high profile and high value crypto heists suggests that this playbook of best security practices is still being written.
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