The nascent crypto market is exciting and innovative, but it’s far from foolproof, which means anyone investing should be cautious.
Cryptocurrencies are prone to massive gains and losses, so when you invest, you should do your research and learn as much as you can.
Even so, you’ll be subject to plenty of drawbacks, which is why we’re pointing out the risks of crypto investing in Canada.
1. Volatility in price
As we mentioned, it shouldn’t be a surprise if the value of your crypto fluctuates significantly from one day to the next. There are plenty of examples of popular cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) suffering massive declines in a matter of hours.
These types of increases and declines can occur for a variety of reasons. For example, government legislation or restrictions, a coin getting listed or delisted on a popular exchange, or new features and functionality can all be reasons for price volatility.
2. Regulatory legislation
One of the most significant advantages of blockchains is their decentralized nature. Due to their lack of intermediaries, transactions can complete faster with fewer fees to pay.
However, it also means that cryptocurrencies don’t have the backing of governments or financial institutions. As a result, if a project you invested in goes to zero, you have no recourse.
By comparison, other types of investments are protected in Canada, so if you lose your money, there’s a good chance you can recover it.
Because of these risks associated with crypto, governments are regularly implementing legislation that will impact how crypto is handled.
Some are banning them altogether, while others are making Bitcoin their country’s legal currency.
Canada falls somewhere in the middle of these two extremes. While the government doesn’t recognize crypto as legal tender, it has determined that crypto should be viewed as a commodity. As a result, crypto is taxable, which gives it some legitimacy.
3. Technology shortcomings
Blockchain technology has been around for over a decade but is still relatively new. As a result, bugs and kinks still need to be worked out.
There are underlying security measures built into blockchain technology, including consensus mechanisms designed to validate every transaction. Unfortunately, no blockchain is completely secure.
This is why many exchanges tell you to back up your wallet regularly. This helps to protect your funds against failures that may occur on the blockchain. It also helps if you make a mistake and unintentionally remove your wallet.
There are also concerns about advancements in computing. For example, the future of computing will give bad actors the power they need to hack crypto exchanges or wallets quickly. If that happens, the future of crypto could be significantly impacted.
4. Hacks, frauds, and scams
Another considerable risk associated with crypto investing is the potential for hacks, frauds, and scams. Unfortunately, exchanges, platforms, investors, and others have lost hundreds of millions to these types of bad actors.
All three are regularly defrauding and exploiting investors as they continue to show a healthy appetite for cryptocurrencies. Unfortunately, the sad reality is that there has been no shortage of rug pulls, hacks, and scams throughout crypto’s existence.
Not to mention fake platforms, pump-and-dump schemes, and other fraudulent projects bent on taking other people’s money.
As a result, you need to ensure that you’re doing your due diligence for any opportunity that comes your way. Even if you believe the source is trustworthy, don’t just hand over your money before you confirm the project’s legitimacy.
5. Lack of liquidity
Lack of liquidity means you can’t quickly and easily access cash in exchange for your asset.
For example, if you’re investing in certain cryptocurrencies, there’s a good chance your funds aren’t as liquid as they would be with other types of investments. That means you might not be able to cash out as quickly as you want.
When this happens, you experience slippage. If you’re new to trading, slippage occurs when the price you get doesn’t meet the price you want.
It’s when the gap between what buyers are offering for an asset and what sellers will accept changes while you are waiting for the trade request to be completed.
Unfortunately, this is a common occurrence when it comes to trading cryptocurrencies. If you’re trading especially volatile assets, you could see your slippage move as much as 1%.
Check with the crypto exchange you’re using to reduce slippage. Most platforms should offer slippage warnings or estimates so you can be as prepared as possible.
6. People make mistakes
When we see the phrase “people make mistakes,” we’re quick to point out what happens when others fail. However, this also applies to ourselves.
There are plenty of stories out there of people forgetting their passwords or losing their private keys. When this happens, they’re locked out of their wallets and can’t access their funds.
People make all types of mistakes when it comes to navigating the world of cryptocurrencies.
A few examples include: forgetting to back up a wallet, using the incorrect address when sending funds, and entering the wrong amount for a trade.
Of course, these types of mistakes aren’t limited to just individuals. Companies make errors as well.
Sometimes these errors result in exchanges losing hundreds of thousands of dollars, like when an exchange misses a decimal point for its trading fees or lists a coin that shouldn’t be available.
As you can see, there are several risks when it comes to crypto investing in Canada.
However, that doesn’t mean you should completely abandon doing so. So long as you take the proper precautions and necessary steps to protect yourself, you should have no issues when investing in cryptocurrencies.
Confirm any investment is legitimate, use an exchange that protects against slippage, and always double-check your transactions before submitting them. Above all, remember never to invest more than you can afford to lose.