Risks as we know are a part of our daily lives, they either yield a positive or negative reward in the end.
There is no doubt that cryptocurrencies, digital assets and blockchain-based business models are here to stay, understanding the risks that are associated with this emerging market and their underlying technologies is very essential and provides a risk management approach for the participants in this ecosystem. Let’s dive into some of the risks:
Misinformation, Manipulation and extortion: The Cryptocurrency ecosystem has become common for these. Some startups in their quest to win over investors cook up information just to meet the high expectations of investors in order to manipulate and take money from them. While there’s always the niche that goes- invest what you can afford to lose, it is very certain that nobody will just decide to want to lose money for any reason. These manipulations ends up breeding scams and most projects over the years shut down with some underperforming making investors lose money. As an investor in this space, one needs to be vigilant, verify every information before taking a decision.
Cyber risks: Most Blockchains like the Bitcoin and Ethereum Blockchains have proven to be very resilient over the past few years, but most of the firms that plug into it come with their own level of risks for the users. Some cyber risks such as mysterious disappearance, ransomware attacks, phishing attacks and AI-powered bots scouring the internet for weak links and easy prey are becoming very popular. There are a few people who have lost access to their accounts or funds as a result of such attacks.
Human Error and Forgetfulness: Human error and forgetfulness is also seen as a major risk. Forgetting a password, refusing to backup a wallet with funds and exposing one’s private key or seed phrase can spell total loss of crypto assets. Not everyone is lucky enough, even sometimes losing a seed phrase that was saved somewhere means one’s assets may be lost forever especially in noncustodial wallets. The prospect of being locked out, losing hardware or facing geophysical risks. There can also be buyer’s remorse which happens as a result of a buyer missing out on a potential profit or cutting down losses because of the highly volatile nature of cryptocurrencies. This can also bring about extortion, blackmailing and threats from bad actors when one mistakenly makes it possible for a connection to be created between them and their assets which are mostly publicly visible on the blockchain.
Unsafe Havens: The unclear regulatory nature of some regulators with regards to cryptocurrencies create a lot of uncertainty in this market. One doesn’t know when their regulators will get up one day to impose a negative stance to affect users and holders. There are mostly little to no tax laws regarding this asset in most parts of the world even though some countries are setting the pace to become a safe haven, time will tell.
Uninsured, Illiquid and intangible assets: Most assets in this space are either illiquid or have very low liquidity which makes it difficult for investors to enter and exit these markets easily. Uninsurance is a major risk as there is no deposit floor, except with a few services providers, cryptocurrencies are mostly uninsured, once a person loses an asset, it’s forever.
Storage and care: Even though noncustodial services have their downsides, they are the best storage method for Cryptocurrency assets. Your coins are only yours when they are under your control in a software or hardware wallet. Most users prefer to leave coins on centralized services and exchanges and go for them when they need them, this isn’t only bad but dangerous. There have been instances where some of these centralized services or exchanges get hacked or shut down leaving users with no way to get their assets back. Always remember, not your keys, not your coins
Some major risks associated with Decentralized Finance services are bugged smart contracts, phishing attacks, bad actors using smart contract interaction and approvals to gain access to user’s funds, risk of liquidation in lending platforms, impermanent loss that comes as a result of liquidity provision in some AMMs among others.
To conclude, there are risks everywhere and in everything and there are a lot of good sides and rewards. It’s this reason why major companies have jumped onto the train over the last few months, we believe they have weighed the risk and reward levels already and there’s a lot of growth already.
ASSET MANAGEMENT
Investing in more cryptocurrency assets comes with the need to keep track of performances to help in risk management. Having a simple tool to keep track of these is very essential. Over the past few months such applications have been launched in the DeFi space to provide the easiest way to build and manage a person’s entire portfolio.
Applications such as Zerion enable users to explore, search, filter and evaluate the entire DeFi market and assets in one place, buy, sell and even invest. Users can track their entire portfolio to see their net worth at no cost. Accessing one’s ROI (Return On Investment) is very important to help a user know whether they are in profit or loss. All these can be done from a single application, making investing seamless and very easy.
In Decentralized Finance, Liquidity places a very massive role and a tool to help every liquidity provider is normally on high demand. APY.vision is an all-in-one liquidity pool analytics and yield farming rewards tracking tool that lets users manage their liquidity pools and track yield farming rewards with a single and easy dashboard. Because liquidity pools are complex and have many variables that dictate profit or loss, it is essential to have tools to understand what is happening with your various positions. On the APY.vision dashboard, there is a research section for discovering new opportunities for investing in liquidity pools. One can compare thousands of pools on several protocols based on metrics like reserve size, fee revenue, impermanent loss, average volume and APY%.
APY.Vision is one of the essential tools for liquidity providers to help find the pools with the best ROI.
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