Hidden risks of investing in cryptocurrency. How to Save Your Money

Hidden risks of investing in cryptocurrency. How to Save Your Money

There are many situations that can bring losses to even the most successful portfolio.

High volatility, experimental technologies, as well as the presence of "scams" masquerading as real projects, can destroy user deposits in case of making wrong decisions. However, even if the account is in the black, and in time open positions show multiple growth, it is worth remembering about the additional, unrelated to the market situation, features of crypto investment, which, under a combination of circumstances in a certain way, can deprive investors of well-deserved profits.

Use of centralized exchanges and services

Centralized exchanges are participants in dynamically changing legal relations in their jurisdictions and can also comply with the instructions of the authorities of other countries regarding users whose accounts are verified using the addresses of these countries. Certain tokens may be available in the jurisdiction of users today, and tomorrow banned by a court decision. In the same way, the functionality of the exchange can also be turned off: deposit and withdrawal of funds, P2P trading for fiat money, access to participation in initial token offerings.

The need to confirm the identity of users and its complexity can also change dynamically. The procedure for verifying accounts in most cases is automated and requires a standard package of documents, which often includes a receipt of rent in the name coinciding with the name in the document confirming the identity of the user. There are cases when uploading a photo of such a receipt is not possible, for example, if the user rents a house - on the receipt will not be the name of the user, but the name of the owner of the apartment.

In rare cases, exchanges may also request confirmation of the origin of funds in the account, freezing them until they pass the verification. Services can also freeze the account for sending funds to dubious addresses and services or for participating as a link in such a chain. For this reason, it is worth checking with friends asking for help to send them cryptocurrency, what is the purpose of their acquisition and what they plan to do with crypto assets next. If the user is not sure of the honesty of the intentions of his friends, it will be more reasonable to refuse help. Passing the verification of the origin of funds and confirmation of the fact of non-participation in dubious services are subjective and opaque processes and can be difficult even with all the necessary documents.

Any difficulties arising from the participation of third parties in the work of services when investing in cryptocurrencies are recommended to be minimized. Investors should give preference to services and software solutions that provide users with full control over their funds, and also do not forget about the axiom of the crypto space - only the possession of private keys guarantees real ownership of funds.

If it is completely impossible to exclude the use of centralized services, it is worth laying the potential risks associated with the sudden disappearance of access to such services, checking yourself with a simple question: will the entire crypto portfolio still be in the black if tomorrow the exchange for some reason closes one of the user's accounts with part of the portfolio funds? The risks of using centralized services can be compensated by some benefit from using the service, for example, a profitable promotion offer for coin staking or a consistently functioning trading strategy of the user. On the contrary, simply accumulating bitcoin or ether for a long time on a centralized service would not be a good idea.

Self-storage of private keys

This category includes the risks associated with the chosen method of storing private keys. If users store private keys on a computer or flash drive, it is worth thinking about the potential possibility of losing access to such a medium or the failure of the storage medium.

The solution to the problem will be to duplicate private keys on a second secure medium or paper. By creating a cold wallet on paper, users plan long-term storage of funds, and some even think about additional savings to the future pension. In this case, it will not be superfluous to think about what will happen to the paper and paste with which the private key is written in a few decades - the fading of just a few letters of one of the words of the private key will make access to the wallet difficult.

If the user stores large reserves of funds in cryptocurrency, then it is worth thinking in advance about a plan for possible access to funds by relatives in case of physical inability to use private keys. Unlike personally tied brokerage or bank accounts, the state will not be able to be a guarantor of the transfer of cryptocurrency inheritance and the process of transferring funds to relatives in the event of an accident must be fully planned by users themselves.

Selectivity of human memory

A unique category of risks of loss of successful investments is represented by situations related to the loss of the fact of making a seed investment from memory. The nature of seed investment involves investing small amounts in a variety of startups, stocks or tokens. If the user does not follow the market regularly, there is a possibility of not being aware of a successful investment and completely forgetting about it after a few years due to the rare use of a browser extension or the inability to immediately add an uncharified token to the wallet. The solution to this problem will be to subscribe to the newsletter of the project or the telegram chat of the community of the project in which the user invested. So that the flow of information does not interfere, you can make a separate folder for mailings, and send the telegram chat to the archive.

Forgotten crypto gifts can be attributed to the same category. With the popularization of digital assets, users could receive gifts in the form of tokens, cryptocurrencies or NFT for the new year. If a person is not interested in the crypto industry, such a gift will probably be forgotten and lost if it is not immediately taken care of properly. A gift reminder or the gift itself in the form of private keys can be deposited next to important documents or precious jewelry. You can also solve the problem in a creative and New Year's way - to make a reminder of the gift in the form of a Christmas tree toy, so every new year the user will remember the fact that he has a digital asset when he decorates the Christmas tree.

Leveraging sector innovation

The greatest profits and percentages per annum can be obtained by participating in the newest services, NFT platforms and DeFi pools, but the newer the technology, the less tested its protection is and the more vulnerable the user's funds. In the first months of 2021, at the beginning of the integration of the NFT platform on the Binance exchange, a security hole was discovered that allowed attackers to withdraw funds from user accounts bypassing two-factor authentication. In the DeFi-cell, almost every successful project was subjected to hacker attacks without exaggeration, so December of the past year was marked by the hacking of the Badger DAO, which led to a loss of funds of more than $ 120 million.

One solution to the hacking problem will be to use multiple DeFi protocols and NFT platforms connected to multiple wallets, which will allow you to lay the potential losses from hacking one of them in your investment strategy.

An innovative solution to the problems associated with the risk of using smart contracts will be the use of insurance services, the heyday of which users may see this year. At the moment, there are already many, both centralized and P2P services for insuring digital assets against hacker attacks. When using the latter, users can both take out insurance for themselves and participate in collective insurance pools, helping to insure the deposits of other investors, while receiving additional profit.


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