Opportunities and Risks of Cryptocurrencies

What opportunities do cryptocurrencies offer and what risks do they entail? To what extent can they change the world as we know it? Since the invention of Bitcoin, users can make digital payments for the first time without being dependent on a third party.

The free currencies are also intended to exclude the manipulation of the money supply. Does this mean that misguided financial policy is a thing of the past? Critics suspect that increasing digitization of money makes means of payment too vulnerable. What do all these properties mean specifically for human life?

In this article, we will look at the opportunities of cryptocurrencies and explain what risks you should be aware of before buying cryptos. We will also answer the question of whether you can still get rich with cryptocurrencies or at least earn an income in 2023.

Buying Cryptocurrencies: Opportunity or Too High a Risk?

Is it still advisable to buy cryptocurrencies today? Gone are the days when every digital currency achieved price gains. In the meantime, users have to be much more selective and cautious if they expect financial advantages.

It is important to first select a trustworthy trading platform. In our comparison of the best crypto exchanges you will find a selection of platforms that CoinPro recommends. Then you should carefully check which cryptocurrency you want to buy.

There is almost no limit to research when dealing with cryptocurrencies. The smaller and more unknown the currency, the more careful you should be with it. In addition, it could be difficult for smaller projects to build a user community at all these days.

According to CoinMarketCap, there are currently more than 23,400 cryptocurrencies (as of April 2023). But not all cryptocurrencies offer opportunities. Most investors therefore rely on the proven coins Bitcoin and Ethereum. Since their market capitalization is already comparatively high, however, no such large jumps are possible here as with significantly smaller projects – especially in the short term.

A promising opportunity through a cryptocurrency arises above all through its intrinsic value. Only consider an investment if the currency of choice has a task at all or can solve a specific problem and stands out from the crowd.

But even apart from price increases, cryptocurrencies can always offer their users an advantage over fiat currencies. You can manage cryptocurrencies yourself and still send them around the globe within seconds or minutes. With fiat money, you are dependent on a third party, such as a bank. At the same time, no central authority can decide on the circulating supply of a cryptocurrency, as the central banks do with fiat currencies. In the following sections, we will try to classify the advantages and disadvantages for you.

Trading cryptocurrencies as a beginner – what you should know

Overview of Opportunities of Cryptocurrencies

While extreme price gains have contributed to the popularization of cryptocurrency over the last few years, these gains were only based on the interest of idealists.

In truth, profits from cryptocurrencies are just a pleasant side effect that emerges when a growing audience trusts the pragmatic benefits of a free currency. Only very few speculators manage to build an income with cryptocurrencies.

High Profits Possible through Cryptocurrencies

It was not the technical peculiarities that gave Bitcoin, as the first cryptocurrency in history, immense media attention, but rather the enormous price development that BTC achieved.

Particularly striking is the year 2017, which BTC began with a value of just under 1,000 US dollars. In December 2017, the cryptocurrency then reached almost 20,000 US dollars.

Since the publication of Bitcoin in 2009, the market value of the free currency has grown by more than 48 million percent. Other cryptocurrencies can also achieve high profits. Others exist in the hope that such price increases will follow.

Bitcoin price forecasts about a possible price development are therefore very popular among users. However, these are purely speculative and only represent a possible scenario.

Independent Payment System / Separation of State and Money

Bitcoin and other cryptocurrencies provide both an independent currency and an independent payment system. It is the first serious attempt in the history of mankind to provide for the separation of state and money.

The technical properties required for this make Bitcoin something special and justify the term “cryptocurrency.” Even before the invention of Satoshi Nakamoto, there were digital currencies, but they were never secure enough against manipulation. They lacked the blockchain.

It was only through the implementation of the blockchain that the first cryptocurrency was created, which, according to the current state of technology – unlike previous digital means of payment – cannot be manipulated.

The aim of the invention is to deprive foreign parties of control over their own money. This guiding principle applies both to banks and to governments. Nowadays, most people receive their income by bank transfer. This creates a so-called counterparty risk.

The money is de facto in the custody of the bank until it is withdrawn by the owner. Then, however, it can no longer be used in digital payment transactions. Cryptocurrencies solve both problems at once.

They therefore offer users protection against manipulation, censorship and confiscation. Therefore, they are particularly interesting for people who do not have a bank account or are exposed to state persecution as dissidents.

Crypto advocates point to the general possibility of taking on more personal responsibility. A crypto-based economy is essentially dependent on the free will of users.

State control over individuals generally decreases – so much so that assets cannot be seized immediately even in the event of tax offenses. As a result, enthusiasts hope that government spending can be better controlled by the people in the future and the financing of wars can be avoided.

Anonymous Payments

Another feature that allows state bodies to withdraw control over their own money flow is anonymous payments. Thanks to cryptocurrencies, your own identity can also be protected from private organizations.

While your own real name can usually be associated with a conventional payment – for example via a credit card payment or a bank transfer – a name cannot be linked to a blockchain address.

Not all blockchains are equally well suited to keep your own identity secret. Most blockchains are transparent – including Bitcoin and Ethereum. In these cases, therefore, one does not speak of anonymity, but only of pseudonymity.

Centralized service providers and authorities may be able to find out the true identity behind a blockchain address using public and personal data provided as part of a KYC procedure.

In order to avoid risks of this kind, so-called privacy coins were created after a few years. They encrypt their blockchain so that data is not publicly visible. This type of cryptocurrency offers the opportunity to determine your own money yourself and completely privately. This is particularly an advantage for citizens in states with strong surveillance.

What are the Risks of Cryptocurrencies?

What are the risks of cryptocurrencies? They give the average user much more power over their own money than they are used to from the fiat system. However, this also creates greater personal responsibility. If the user makes a mistake, it may weigh much more heavily than would be the case with fiat money.

Users of cryptocurrencies must therefore exercise more caution. In addition, the revolutionary character of digital assets could lead to conflicts with authorities. The aim is to build the networks so robustly that they can withstand any attacks. Whether this would really succeed according to the current state is unclear.

Market Risk of Cryptocurrencies

In addition to being an instrument of freedom, Bitcoin and Co. serve primarily as a speculative investment. Users acquire cryptocurrencies to make profits. Of course, losses can also occur. Careless speculators can quickly lose their money. In this context, one speaks of the market risk of cryptocurrencies.

The problem: Due to massive speculation, cryptocurrencies are exposed to extreme volatility. Often their price changes within hours by double-digit percentage values. For comparison: The average increase in value of a share is ten percent per year.

If users collectively lose faith in a cryptocurrency, it can lose its entire value in the short term. Such an example could be observed in May 2022, when the previously popular cryptocurrency Terra (LUNA) collapsed. The spectacle was triggered by the fear of price losses themselves. Most users therefore wanted to get out quickly. Otherwise, an entire currency often collapses. The event does not always play out so tragically.

Fraud

Unfortunately, fraud (also known as scams) is widespread in the crypto market. The way cryptocurrencies work makes it very easy to create new, useless projects. Fraudsters can then easily sell their own digital currency to their victims without revealing their own identity.

The intervention of authorities is also very difficult, as it may be impossible to freeze coins. In addition, the cryptocurrencies with which the gullible investors acquire their new investment may have long disappeared.

Pyramid schemes are very popular. These are scams that also exist outside the crypto world. Due to the simplicity that crypto offers, however, they have experienced a new upswing over the last few years.

Ponzi schemes, as they are also called, are just one scam among many. The so-called exit scam (also exit scam or rug pull) is also known. In the exit scam, a service provider takes the customer’s cryptocurrencies into custody. Instead of paying them out again at some point, however, he simply keeps them.

Phishing attacks aim to obtain user data in order to then empty the victim’s wallet. This procedure is more difficult when using a hardware wallet.

There are also Giveaway Scams or Double Your Bitcoin Scams. Here, the perpetrator promises users gifts. If the user pays his Bitcoin (or another cryptocurrency) to the address of the perpetrator, he should then receive double the amount back. However, a repayment will then no longer occur.

In order to protect themselves from fraud, users should deal extensively with the project of their choice before investing their money. A clear sign of fraud is the promise of profits without a recognizable or conclusive origin.

Worth reading: How to recognize crypto scams

Complicated Custody

For many new users, the custody of cryptocurrencies seems complicated. The reason for this is the system of asymmetric encryption, which creates various alphanumeric codes that provide the owner with different functions.

In practice, the system differs significantly from the more familiar account model in that you cannot simply log in online with a username and password to gain access to your own funds. Instead, you have to synchronize a private key or a key phrase with a blockchain. The wallet then examines the blockchain for digital coins that are under the authority of the respective private key.

However, if this sensitive data is lost, there is no chance of recovery. The money then remains unusable forever. If the data falls into the wrong hands, the assets can be stolen. Compared to a bank account, the chance of ever getting stolen money back is very low. The prosecution of the perpetrator is also difficult in many cases.

In our crypto wallet comparison we will go into how you can safely manage cryptocurrencies. You will also find details on the best models.

Regulation and Bans of Cryptocurrencies

Due to their subversive nature, Bitcoin and Co. are extremely unpopular with the authorities of most states. Accordingly, there is a great danger that regulation and bans of cryptocurrencies will occur sooner or later.

There are already several countries with crypto bans. The expression of these bans differs depending on the jurisdiction. The best known are a complete ban in China and the ban on crypto trading in Nigeria. In both cases, however, the legal measures did not have the expected effect.

In China and Nigeria, cryptocurrencies are still popular today. The legal ban still has a strong influence on users. People from the affected countries no longer have access to centralized crypto exchanges, which are by far the most popular trading platforms globally.

To this day, the crypto market is concerned about possible bans by particularly influential states such as the USA or the European Union. This threatens drastic price losses. The ban in China caused the Bitcoin price to fall by around 20 percent in September 2021.

In the long term, however, it did not stop BTC. The price recovered after a short time and set a new all-time high two months later.

More critical could be the attempt of a confederation of states to paralyze a blockchain network. Depending on how they function, different blockchains offer different attack vectors. Bitcoin is essentially based on mining centers, which represent large targets.

PoS blockchains run the risk of becoming victims of a majority takeover. Since the network is closely linked to the coins here, states could simply acquire the majority because they have control over the issuance of their fiat currency.

Conclusion: Correctly Assess the Risks and Opportunities of Cryptos

How can users correctly assess the risks and opportunities of cryptos? Dealing with the new asset class needs to be learned. Once the basic principles have been understood, the use is uncomplicated and reliable. Fraud schemes can then be easily recognized.

State attacks have so far not proven to be an enormous problem. Technical errors are considered unlikely in the blockchain. In general, the technology is considered very secure and resistant to manipulations of various kinds.

When using Bitcoin and Co., one thing is particularly important: Always keep a cool head. Don’t let sudden price movements panic you. Don’t be too greedy. Many fraudsters provide half-hearted products.

Victims often ignore clear warning signs out of good faith. Instead of investing rashly out of greed and losing your entire investment, you should always refrain from spending your money if in doubt.