Investing always comes with a risk.
There are risks whenever you invest in whichever asset class– real estate, stocks, oil… But Bitcoin has some unique risks that you need to be aware of so you can protect yourself better. The first step any investor should take is educate themselves on the asset class they’re planning on committing too. And that’s exactly what we’ll be doing!
Let’s take a look at the types of risk in Bitcoin and Crypto investing, and how you can manage them.
Volatility Risk
Satoshi Nakamoto invented Bitcoin in 2008 as a direct response to the 2008 Global Financial Crisis, or the GFC. In a nutshell, from 2007 to 2009, the US housing market crashed and burned, and this downturn spread throughout the world as a result of linkages in the global financial system.
Millions of people lost their jobs, prices sky rocketed, and major economies around the world experienced intense recessions they’ve never seen since the Great Depression in the 1930s.
Satoshi Nakamoto made Bitcoin to answer the issues of trust and stability that financial institutions couldn’t back during the GFC. Bitcoin’s most revolutionary trait is the fact that it doesn’t need corporate banks or centralised financial institutions to circulate and function.
All this comes without saying that Bitcoin is still fairly young and still in its adoption phase. Think of these wild price changes as growing pains, a price to pay for being the first to adapt such a revolutionary financial system.
Bitcoin is designed for the long-term, generational-wealth building type of growth. If you judge Bitcoin by its short-term volatility, you’re misunderstanding its purpose. Bitcoin is not about day-to-day gains. When you zoom out, you’ll see that over a 10-year time frame, Bitcoin has consistently outperformed every other asset class. While the price may fluctuate in the short term, it’s pretty clear where Bitcoin is headed: UP.
Human Error Risks
With great power, comes great responsibility. Bitcoin offers unparalleled freedom and security, but since it’s a global and decentralised asset, there are no institutions that can act as a safety net when an investor screws himself up. And these simple, seemingly small humane mistakes can cost you a lot.
Lost Access
Keep your hardware wallet safe and backup your seed phrases physically– never digitally.
Ideally, log into your hardware wallet at least once a year to ensure that you still remember your password and your funds are still safely in there.
Wrong Address
Bitcoin transactions are irreversible. Sending funds to an incorrect or invalid address means that your money is just gone… forever. There isn’t a customer help desk that you can phone, like in banks.
Before sending, double and triple check the address. Send a small, test amount first before sending the whole thing.
Incorrect Network
Do you know which blockchain the token you want to buy is on? There are lots of different blockchains. You also need to have the native coin for transaction fees.
Do your due diligence first before diving headfirst. Check the token on CoinGecko or CoinMarketCap for its wallet and blockchain, what exchanges (centralized or decentralized) it can be traded on, then copy the exact token addresses.
Scams
Emails with very clickbait-like subject lines like congratulations, you won 1 BTC– claim now are most probably scams. Don’t click dodgy links in emails, or even in websites in general.
Scammers can make and use fake websites to get your information and drain your wallet. The ones asking you for your private keys want to steal your crypto.
Ponzi Schemes
Non-crypto related scams are rampant and come in all forms. Someone asks you for money as a form of investment and promise amazing returns. But when you want to withdraw your money, suddenly you need to pay more or you just can’t access it easily.
Be careful when investing. Some of these scammers aren’t even involved with crypto.
Regulation Risks
Bitcoin is the people’s financial system and there are no governments or institutions that can or will ever control it. This independence makes BTC the perfect currency, commodity and mode of security– so much so that some countries may even view it as a potential threat to existing financial systems.
Different countries have different ways of reacting to Bitcoin. Some countries like Argentina and El Salvador embrace this new freedom money; others impose heavy regulatory rules or maybe even outright ban it from use. There’s nothing we can do about this, other than move to a crypto-friendly country.
Don’t let yourself be imprisoned in a country that hinders financial sovereignty.
Emotional Risks
To learn more about emotional risks, stay tuned for our upcoming blog about emotional intelligence!
But basically, the extreme price swings over short periods of time makes a lot of investors feel the entire range of human emotions in just a short time.
Investors panic-buy at the peak then panic-sell when corrections happen.
The ideal way to combat these emotional risks is to adapt a long-term investor mindset and do dollar-cost-averaging. Data shows that anyone who held BTC for a minimum of 4 years or one full cycle hasn’t lost any money at all.
As you can see, investing in Bitcoin is no riskier than investing in any other traditional asset class. But in the end, Bitcoin outperforms all these other assets– as long as you manage the risks effectively.
To learn more, check out my master course ASCENSION. Free preview of the first part is also available below.
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