The crypto craze continues to sweep across the entire world. More and more people are getting into cryptocurrency buying, selling, and trading. Even the whole government are seriously considering adopting central bank digital currencies. About 2 months El Salvador officially made Bitcoin legal tender. Right now it is reported that the number of Bitcoin wallets now outnumbers the usual bank accounts. Even the government of El Salvador purchased 1100 BTC. Nigeria also recently unveiled its central bank digital currency. There is a lot happening – the NFTs space is also driving up cryptocurrency adoption. It sounds all rosy at first glance but there are hidden dangers in getting involved in cryptocurrencies. Let us talk about them here.
This is no doubt the first danger worth talking about. Cryptocurrencies are generally volatile or mercurial. Ever noticed how unpredictable weather can now be in Zimbabwe. You can wake up to clear and sunny skies only for the weather to take a sharp turn towards rainy or chilly weather. That is what can happen with cryptocurrencies. I can give an example of Bitcoin 10 years. At one point the value of 1 BTC surged from US$2 to US$32; a 1500 per cent spike. Then a few days later, its value dropped to US$0.01. In 2013 its value once plummeted from around US$260 to US$50.
In the same year, half of Bitcoin’s value went away when China banned Bitcoin. Funnily, speculations of a looming ban somewhere can even drive down value. These are just a few examples of the volatility issues which are a huge risk in cryptocurrencies. The basic point is that there are infinite possible situations or circumstances that can negatively affect the value of a cryptocurrency. The ironic thing about all this is that it is mostly never easy to anticipate such situations and their effects.
The examples I just cited earlier also spoke of another danger of cryptocurrencies – software vulnerabilities. I know you hear about the use of cryptography in securing blockchains. You would think cryptocurrencies are impervious to hacking attacks. Sure enough, great efforts, time, and resources are invested in ensuring security. However, hackers can still find ways to penetrate these systems – especially cryptocurrency exchanges. For instance, when trading volumes sharply rise, this can allow hackers to strike.
Someone with the knowledge can hack into a crypto exchange and siphon crypto from other people’s wallets. The use of malware is also common in executing such attacks. It is reported that phishing tends to be the topmost means through which hackers strike. Millions every month get to be stolen by hackers so it is a big issue.
Then we have software dynamics that can affect any system. Any software-based system can be subject to errors from time to time. Whilst some of those errors can be relatively small and easily rectifiable, some can be costly.
In 2017, several software bugs in a crypto wallet service led to the loss of over US$300 million worth of crypto. Interestingly, this was the result of a mistake caused by a particular developer. As they tried to reverse the mistake they ultimately locked up numerous wallets in the process. What this effectively meant was that those wallets could never be accessed again. Just like that millions were lost.
Lack Of Regulation
Cryptocurrencies are decentralized which means there is no central control. This is part of cryptocurrencies’ unique value proposition. This is unlike fiat currencies which can be controlled by central banks. When Bitcoin came along that was the whole idea – to make it possible to not be governed or regulated. However, this opens up the possibility of unchecked behaviours.
There have been numerous accounts of cryptocurrency exchanges or wallet service providers that vanished with people’s crypto. This is largely due to the lack of regulation so some greedy people can swindle people. That is why governments are increasingly eager to regulate. At the same time regulation seems to comprise the decentralization aspect. Thus it is a delicate scenario and the grey area it creates provides room for fraudulent activities.
Recently crypto was developed premised on the popular Squid Game series. Its value quickly rose to over US$2000 in a few days. People went into a frenzy buying crypto. When a substantial number of people had invested (of which they could not cash out), the developers cashed out. Its value went down to US$0, just like that, but the developers went away with millions of US dollars. The lack of regulation does play a role in making such unimaginable things happen and this was not the first time.
Private Keys Dynamics
The issue of keys is not as small as some might think. Generally, people are always encouraged to keep their private keys in secure places. However, there are a high number of people who lose their private keys and end up unable to access their wallets. By the way, private keys are essentially your passwords or PIN to your wallet. They are not the kind you can just memorize so if you do not remember where you kept them, you are doomed.
A reputable crypto data firm recently cited that over US$100 billion worth of Bitcoin is currently inaccessible. ‘Inaccessible’ i.e. due to failure to recall where one kept their private key or have lost it somehow. As much as people can take precautions to avoid this it still is a huge risk associated with cryptocurrency. You cannot just recover or change your private key like you would your email password or bank account password or PIN. It is more like one of the things that make cryptocurrencies secure can also be your demise.
Susceptibility To Scams
Just as much as scamming is commonplace with regards to fiat currencies, it is also the same for cryptocurrencies. There are now so many crypto scams in the world and new ones continue to emerge. Some of the common ones are imposter websites (or social media accounts), fake mobile apps or wallets, and scam emails, amongst others. I was reading a story earlier today about how Facebook verified an Elon Musk fan page as his official page. Guess what, that fan page turned out to be a Bitcoin scammer – now the page no longer exists. There are also lots of scams that are like pyramid schemes where people are promised crazy returns.
These are 5 of some of the hidden dangers of cryptocurrencies. There are huge prospects in the world of cryptocurrencies but I implore you to tread carefully. There are too many examples around for you to become the next victim. Ruthlessly do your homework before investing in any cryptocurrency.