Beyond Volatility: 5 More Reasons You Should Be Wary of Crypto
Cryptocurrency is everywhere at the moment, even if it remains a niche area in terms of adoption. Nonetheless, it has become a trillion-dollar industry, and one that, according to some, could become much more dominant in economics and society in the coming years. But you’ve probably noticed that warnings about cryptocurrency are also prevalent in the media. Mostly, they tend to focus on the extreme volatility of cryptocurrencies. Bitcoin, for example, is worth about 40% of what it was last November.
Still, while warnings about volatility are wise to heed, it’s also worth remembering that the crypto industry is no longer only about buying coins and hoping that they rise in value. The industry now operates in a vast ecosystem, one that offers goods and services. It has gone beyond the idea of retail investment. And that means there are pitfalls in many areas.
Below we wanted to look at five reasons for you to be careful when interacting with crypto. To be clear, this is not meant to be a critique of cryptocurrency in and of itself. More specifically, it aims to point out that we remain in the wild west phase, and that buyers should be cautious.
- Regulators are getting tough
Not long before this article was being prepared, it was announced that Tornado Cash was being sanctioned by the US Treasury. It means that it was illegal for any American to interact with the crypto platform. It isn’t abundantly clear what Tornado Cash did wrong, although it was suggested that the platform is paying the price for its policy on “mixing”, meaning it hides where the source of funds comes from. As you might imagine, this might attract organized crime and rogue states for money laundering. Regardless, it means that overnight many normal crypto users are suddenly engaging in illegal activity. Moreover, we have seen several crackdowns like this in recent months.
- Crypto platforms can overpromise and underdeliver
As mentioned, crypto platforms can offer all types of good and services. We have, for instance, the rise of crypto casinos, most of which are unregulated and unlicensed. These platforms tend to overpromise and leave players exposed to legal action. Moreover, there is an issue with the auditing – how do you know crypto casinos are playing fair? If you play casino games, you are better off researching the best online casinos that payout and that hold a license to operate in your country. That way, you know that you the games are monitored for payouts, and you have legal protections should there be some sort of dispute.
- Crypto is rife with scams right now
Across the first ten days of August, there were around half a dozen major cryptocurrency hacks, most of which drained millions of dollars from unsuspecting users. The most notable event was the Solana Wallet hack (August 3rd), which saw around $5 million drained from Solana (a popular crypto blockchain) wallets. This wasn’t the largest hack in early August, but it was the most shocking. It was akin to seeing multiple bank accounts drained from individual bank premises. But with a normal bank, you will likely get your money back. Can we say the same for crypto? It’s doubtful.
- Social media is much too skewed
One issue we have with cryptocurrency is the lack of balance in the media, both in terms of regular news media and social media. With the latter, there is a lot of optimism. It’s one of the reasons that critics believe crypto is a get-rich-quick scheme because you often find it difficult to find anyone talking about the downside. Remember, just as you have celebrity influencers like the Kardashians, there are also crypto-influencers, and they want people to buy, buy, buy.
- Some projects are much too complicated
Back in May, there was a massive crash in the crypto markets caused by the decline of Terra Luna, a crypto project that promotes a stablecoin. A stablecoin is a crypto token that mimics a real-world currency, so one TerraUSD would be worth $1. Normally, stablecoins are backed by real-world reserves. So, if there was $10 billion in stablecoins, the project must hold $10 billion in physical cash. But Terra Luna was an algorithmic stablecoin. If you don’t know what that is, then don’t worry; you are not alone. Regardless, the algorithm did not work, and the crash caused all Luna investors to lose billions. The point we are making is that many did not know what they were investing in. Be careful.