Bitcoin led the way in the cryptocurrency investment world. It is no longer news that there are so many of such digital currencies right now that are also doing quite well and challenging strongly for relevance.
But are digital currencies the future of money? What dangers do they pose to the financial world and prospective investors? It is crucial that every investor takes a close look at the dangers.
To begin with, if you like to invest in digital currencies, investing all of your life savings on the technology would be a huge mistake, at least for now.
Today’s cryptocurrencies are incredibly volatile; they are still very new and not yet fully adapted in today’s market. Some countries still don’t recognize their use. Though this may change in a decade or even in a few years, it’s still too early to judge.
If you don’t know what you’re doing, you can quickly lose all your money if you go ahead to throw in some money into the concept. After all, it took crypto investors many years to earn their rewards, so don’t fall for the get-rich-quick scheme. They definitely have benefits but the disadvantages are there also.
To be candid, you need to do the very first important things before investing.
Research Is a Must
Among the most critical keys to success in the crypto market is to properly investigate the cryptocurrency you’re about to invest in, and you need to have the skills to identify digital currencies that have no solid foundation.
There is an enormous quantity of crypto coins available today, and most investors tend to ignore the cryptocurrency fundamentals and make hype-based investment choices.
This is particularly common as many do not understand the cryptocurrencies mechanics in which they invest. They merely follow the hype.
Many don’t even know what cryptocurrency and blockchain are and how it works, so start with that, have a clear understanding of what the technology is, and then start researching the many different coins that exist to help you make an informed decision.
The Lingering Dangers
Even though the entire world is beginning to learn more about cryptocurrencies day by day, Legal and regulatory issues are two of today’s major challenges facing the crypto industry.
Because as stated previously, the currency system is still new, banks and governments have not yet developed a fiscal policy guiding the operation of digital currencies.
This partly is owing to the mode of operation of the currency, centralization is strongly discouraged. The danger is definitely there. Therefore, trading laws or even the taxation of the system might be difficult to determine.
The insider game is something that cannot be ruled out.
Although this point is not proven, many think that insider trading and manipulation of the market are prevalent across the cryptocurrency industry.
The reason behind this is that in a day or a few hours, some coins’ value shoots up by dozens of percentages, only to fall dramatically back on the following day to their previous prices.
These incidents are called “pump and dump” schemes and could be used to exploit the unsuspecting investor.
It’s not news that a significant amount of cryptocurrencies are stolen each year, in fact, in 2018, a total of $1.7 billion has been stolen, and that’s just one year. Among the most significant issues that have not been effectively handled by the cryptocurrency system is the security issue.
Make sure to be updated on a daily basis on the happenings in the digital market to be safe as an existing investor.
Cryptocurrencies Seen as Property
For any cryptocurrency investment, among the most serious legal considerations is how central authorities interpretation cryptocurrency holdings. For instance, in the United States, the IRS has defined cryptocurrencies as properties rather than currencies.
This simply means that when it is about reporting cryptocurrency expenses and proceeds on their yearly tax returns, individual investors are bound to related tax laws without minding where they bought digital currency.
This element of cryptocurrency adds complexity issues for United States taxpayers, but there is no end to the trouble. Indeed, it is uncertain whether cryptocurrency investors that have acquired their foreign exchange holdings are faced with extra measures.
According to a CNBC report, “anyone with over $10,000 abroad usually must have to fill the Foreign Bank and Financial Accounts Report (FBAR) with the Treasury Department every year.
Yet another law is the Foreign Account Tax Compliance Act (FATCA). It requires some United States taxpayers to declare their accounts outside the country on Form 8938 anytime they file taxes with authorities, the IRS.
It would seem terribly unfair to expect every taxpayer to understand that and then impose penalties on taxpayers who haven’t done that when general practitioners cannot even figure out 100 percent if an FBAR condition exists, Sweeney said.
All this goes to say that in order to report cryptocurrency profits and losses, cryptocurrency investors ought to take good safety measures to abide by the guidance of tax experts.
This is because the guidelines are regularly changing. This is to say that what has been legally allowed last year may not be in another year or months. This calls for concern.
Among the many drawbacks of digital currencies in relation to traditional financial practices is the lack of a central authority overseeing the operation. This is a probable risk feature for different investors.
Bitcoin has led the way for other cryptocurrencies. It is decentralized, which means it doesn’t have any physical presence including not supported by any central authority.
While governments all over the globe have stepped in to place their regulatory power in different ways, Bitcoin and other cryptocurrencies are still free from major jurisdiction or association. This, on the one side, frees stakeholders from being bound by these organizations.
However, on the second hand, this can lead to legal difficulties. The value of cryptocurrencies depends entirely on the value attributed to them by the investors and owners.
If complications arise with transactions or ownership, investors may be left in troubled waters with no central authority supporting the worth of a cryptocurrency.
Owing to their decentralization, another potential risk associated with cryptocurrencies is on the transaction details. Fiat, usually which are physical products change hands in many of its transactions.
For electronic funds, the creation and use deal with a trustworthy financial institution. None of these ideas apply to operations in cryptocurrency. A legal mix-up between parties in different kinds of cryptocurrency transactions is a possibility because of this fundamental difference.
Again, due to the decentralized nature of the cryptocurrencies, it may be difficult to assess a legal remedy in these situations.
Business Registration and Licensing
As a type of payment, an increasing amount of companies take advantage of cryptocurrencies. Companies can be expected to register and get licensing for specific jurisdictions, as in other financial institutions.
This aspect is not that clear for companies operating in the digital currency market due to the complex and evolving legal status of digital currencies.
For example, companies that accept only cryptocurrencies won’t need to obtain licenses or get registered at all. Whereas, depending on the jurisdiction they belong, they can be requested to submit to requisite authorities.
Business owners are responsible for ensuring that they follow proper legal procedures at both state and local levels for their operations. For example, at the highest federal level, financial institutions need to uphold certain actions related to money laundering and fraud protection, money laundering, and more. Such considerations equally apply to digital currency businesses.
Money Laundering and Fraudulent Activities
There is an extensive belief that digital currencies provide new ways of money laundering, fraud, and other financial crimes to criminal-minded organizations.
This does not have a direct impact on most investors in cryptocurrency who don’t plan to use the technology to practice such crimes. However, investors that are unlucky of being a financial crime victim are unlikely to have legal options like the traditional fraud victims.
This problem can be said to come from the digital currencies ‘ decentralized status. For example, when a digital currency exchange gets hacked and holdings of customers are stolen, there is often no standard measure to recover the lost funds.
Thus, digital currency investors take on some risk by buying and holding cryptocurrency assets. This is why digital currency designers and startups have concentrated so much attention on developing safe ways to hold digital currency and tokens.
Nevertheless, while new kinds of wallets are being published every time, and while digital currency exchanges are constantly enhancing their safety policies, investors have not yet been able to completely eliminate the dangers connected with holding cryptocurrencies.
It is crystal clear that the digital currency world has a lot of dangers embedded in it. The operational mode that is quite different from the regular traditional methods is responsible for the majority of the dangers that investors are likely to face.
The obvious advice for investors is to invest wisely. Don’t put in so much, only invest what you can afford to lose.
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