FTX and Cryptocurrency: 5 Risks Any Crypto Investor Should Consider
Recent news about the end of FTX cryptocurrency has drawn attention to the risks involved in trading in cryptocurrency. In the case of FTX’s collapse in particular, cryptocurrency’s vulnerability to fraud, mere market speculation and liquidity issues have been writ large.
Here are the five main areas of risk all individuals looking to raise funds through cryptocurrency should consider:
1. Market Risks
Cryptocurrency trading relies heavily on “speculation” and false hype. This is a major enabling factor in a well-known kind of cryptocurrency fraud called a “rug pull”, whereby a popular fraudster hypes up a cryptocurrency, receives heavy investments, and then disappears with the cash, leaving the currency to crash.
In addition, the finite amount of the physical currency means that crypto assets can suffer from liquidity issues, the extent of which can be exacerbated by the hoarding tendencies of its traders and the hypothetical demand they can generate.
2. Operational Risks
While a centralized body can validate and control your transaction in the event of a problem, crypto transactions cannot be reversed after confirmation. There is no safety net.
3. Business Risks
Without backing from a central bank, or other national or international financial organization, cryptocurrency values are strictly determined by the value that market participants place on them through their transactions. A loss of confidence in the currency can easily and suddenly bring about large scale collapses of trading activities and catastrophically abrupt drops in value.
4. Cyber/Fraud Risks
Heavy reliance upon unregulated companies, including some that may lack appropriate internal controls, makes cryptocurrency trading more susceptible to fraud and theft than conducting trade and transactions though regulated financial institutions.
There is also very little in the way of recovery options when cryptocurrency is stolen. A thief can fully impersonate the original owner of the a stolen wallet account, and therefore access all funds in the wallet to the same extent as the original owner.
5. Regulatory/Compliance Risk and Money Laundering
Many countries still have not implemented Anti Money Laundering laws that can apply to cryptocurrency trading. The anonymity and laissez-faire money movement offered to the cryptocurrency trader therefore also makes cryptocurrency a ripe target for money laundering.
Cryptocurrencies generate no cash flow, so for you to profit, someone has to pay more for the currency than you did. This is contrastable to the wealth proposition of a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation.