Question of the week: What are the risks of cryptocurrencies and ICOs?

Cryptocurrencies and Initial Coin Offerings (ICOs) seem to be everywhere right now. You hear about them in the news, on social media, and it seems like a new cryptocurrency or ICO appears daily.

As with any potential investment, cryptocurrencies and ICOs have risk. In some cases, they have a substantial risk. The risks surrounding cryptocurrencies and ICOs is typically higher than traditional investments. Let’s discuss some of the specific risks that come along with investing in the “hottest investment trend.”

Cryptocurrency Risks:

1. High volatility

Cryptocurrency prices are volatile. Think about the dramatic changes in value Bitcoin has seen in the last year.

That’s quite a dramatic swing. That’s just the tip of the ice berg when it comes to volatility as Bitcoin has seen its value change by hundreds and even thousands of dollars in a single day at times.

2.Lack of oversight

In the financial markets and investment industry, regulation and oversight is there to protect consumers.  Issuers of cryptocurrencies often misunderstand regulation and oversight which may lead investors to losses without any insurance or other avenues of recovery.

3. Risk of fraud

As we said before cryptocurrencies are a hot button item now, getting plenty of attention in the press and online. When something becomes this popular, the scam artists sense an opportunity and come out of the woodwork. The scam artists will use the cryptocurrencies’ popularity and confusion to separate an investor from their money. We’re seeing this happen with cryptocurrencies through fraudulent investments, fraudulent trading platforms, hackers and thieves.

ICO risks:

1. The project may fail

Many ICOs give out virtual coins or tokens that the consumer can later trade in for a product, service, or potential profits from the endeavor. But what if the product or service your investing in never comes to fruition? Or, if there are no profits to share? Many ICOs, like new businesses fail to get off the ground. When that happens the coin or token you’ve bought is worthless.

2. Limited use of tokens or coins

If the coin or token you purchase has few uses, or one use, you may not get any value in return. . You may not be able to sell your coin or token for what you paid for it, if you can sell it at all. Just because you perceive the coin or token to have value doesn’t mean anyone else will.

3. Risk of frauds and scams

Just like cryptocurrencies, ICOs are a breeding ground for scams. Fraudsters use ICOs using false claims that they are compliant with regulations or do not need to comply with any regulation. As with cryptocurrencies fraudsters and scam artists are using the popularity and buzz around ICOs to run frauds. Some fraudsters have used pictures of celebrities and former court and government officials to lend credibility to their scam.

The online world of cryptocurrencies and ICOs has often been described as the Wild West,. In this kind of environment investors need to take extra caution when investing. Always do your homework and know what it is your investing and what risks come along with it. As with any investment, never invest more than you can afford to lose.