• Yuvan Thakur

Risk and Crypto


Cryptocurrencies are a major factor in the recent explosive surge in popularity of the fintech industry. They offer an alternative mode of payment that is fast, decentralized, and anonymized. However, it is important to consider how safe cryptocurrencies are as both an investment and a mode of payment. This article will focus on the more practical sides of how safe cryptocurrencies are in terms of the networks built around them, rather than technical concepts. To learn more about the inner workings of technologies such as blockchain and transaction validation that allows cryptocurrencies to exist, we have more in-depth articles on this website.


Volatility

Cryptocurrencies are among the most volatile investment tools to be found. The price of a single unit of any currency can be observed to fluctuate so significantly that the price tomorrow can be several times higher or lower than it was the previous day. The risk factor in such an investment is vast with the potential to make fortunes or even take them away.


Exchange Hacking

In 2019, it is reported that 12 major cryptocurrency exchanges were hacked, with the hacked amount crossing $290 million. (selfkey.org) While the fundamental technology behind the currencies might be secure, it is the exchanges that are usually unsafe with many security vulnerabilities that hackers exploit to make away with millions of dollars worth of currency. This may be due to errors in the transfer system, employee actions or malware used to infect the sites.


Medium of Exchange

One of the most widely touted features of cryptocurrencies is safer transactions, yet there is a fundamental issue with this that stems from the lack of acceptance of these currencies as a mode of payment for various services. In India, no one can legally reject a payment made in rupees, as it is considered a medium of exchange. This protection does not exist for cryptocurrencies. Further, in the case of fraudulent transactions or the shutdown of a financial institution, the government steps in to try and get consumers their money back. However, this may not take place in cases where a crypto exchange shuts down or gets hacked, with little guaranteed governmental recourse available to consumers.


Wallets

There are primarily two kinds of wallets — hot and cold. Hot wallets refer to those wallets that are connected to the internet, which allows for faster transactions regularly. Cold wallets are not stored on or active on devices that are connected to the internet. Most crypto hacks that occur are due to private keys and account passwords being accessed by hackers, and the chances of this happening are much greater when the wallet is on a device connected to the internet since the device can be remotely accessed by a hacker.


Privacy

While cryptocurrencies are much more private than regular modes of payment, it is still possible to find out who makes a transaction in some cases. This is done through reading the public keys and the value of transactions undertaken, which can sometimes be traced back to individual sources. However, the level of privacy differs from one cryptocurrency to the next, with some like Monero(XMR) being known as a practically untraceable coin.


Cryptojacking

A phenomenon that isn’t directly related to crypto investing or trading but still affects consumers regularly is that of cryptojacking. This refers to the act of hijacking your computer or phone’s hardware to mine cryptocurrencies. Usually, this occurs when apps or websites seem to be using more of your CPU or GPU, generating more noise and heat than would be acceptable, and if exposed to it regularly may affect the longevity of your hardware if it is not well equipped to mine cryptocurrencies.



To conclude, it must be stated that the crypto coins themselves are incredibly secure, as can be seen by looking further into the technologies backing them. They are decentralized, private, and cannot be controlled by a single entity, granting them many benefits over traditional currencies. However, it is the frameworks surrounding them, like vulnerable exchanges and wallets, that greatly harm both the actual safety and the perceived reliability of cryptocurrencies. Further advances in security protocols in the institutions built to deal with crypto will go a long way in improving the general risk associated with trading in cryptocurrencies.


 

References:


A Comprehensive List of Cryptocurrency Exchange Hacks - SelfKey.

https://selfkey.org/list-of-cryptocurrency-exchange-hacks/


What to Know About Cryptocurrency | FTC Consumer Information. https://www.consumer.ftc.gov/articles/what-know-about-cryptocurrency#:~:text=Cryptocurrencies%20aren%27t%20backed%20by,money%20in%20a%20bank%20account


Which cryptocurrency wallet should you choose | Kaspersky official blog. https://www.kaspersky.com/blog/cryptowallets/22025/


How to play safe while investing in cryptocurrencies like Bitcoin - The Financial Express. https://www.financialexpress.com/market/how-to-invest-buy-bitcoin-cryptocurrency-safely/2170283/


What are the Safest Ways to Store Bitcoin? (investopedia.com)

https://www.investopedia.com/news/bitcoin-safe-storage-cold-wallet/


Image Credits: @tab1962, Canva (Cover Image)

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