3 Huge Crypto Investing Risks And How To Minimize Them

3 Huge Crypto Investing Risks And How To Minimize Them

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It’s easy to see why anyone would want to invest in cryptocurrencies. Some of them have historically produced incredible returns. And other cryptocurrencies are tackling interesting real-world problems in innovative ways.

However, the cryptocurrency space can be risky. Here are three of the biggest risks that I believe can hinder your chances of positive returns.

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Risk 1: Terrible Tokenomics

Crypto values ​​increase when the demand for the currency or token exceeds its supply. When cryptocurrencies are developed, their developers create ways to encourage demand and regulate supply. This is called “tokenomics”, and it differs from project to project. Some designs are very good. But in other cases, tokenomics does not support long-term price appreciation.

For example, I think the Fitness Lifestyle app STAGE (GMT) did not design his Green Satoshi Token (GST) sustainably increase the price. GST is earned for using the app for exercising and is used in the app for playing and leveling up. The GST is burned when used — removed from circulation. However, there is an unlimited offer of TPS. The more people play and use the app, the more GST can be created.

An unlimited supply of tokens is not good for values. But it’s more than that. You can redeem the GST for USD Coin and exchange USD Coin for any other cryptocurrency on a crypto exchange. But logically, the only people interested in buying GST tokens would be those looking to level up faster in the STEPN app.

The irony here is that people who join the STEPN platform theoretically provide a short-term increase in GST values. However, as these new users come online, the GST is issued faster, increasing supply and diluting long-term value.

STEPN seems like a fun fitness app and should probably be treated as such. But I doubt it’s a good long-term income opportunity.

Many bad investments will not be as obvious as this extreme example. But investors still need to know what drives token demand and what regulates its supply. In short, researching tokenomics helps you avoid poorly designed systems.

Risk 2: Unsustainable returns

Like depositing fiat currencies into a savings account at a traditional bank, it is possible to earn returns on your crypto. Often the interest rate for digital currency is much higher than what you would get elsewhere, which is why it is so tempting. But high-yield crypto products are the second huge risk for cryptocurrency investors.

High yield financial products are often not viable. For example, consider Anchor protocol. At one point, users could earn 19.5% return on their TerraClassicUSD by Anchor. This amazing performance drove people to TerraClassicUSD and Classic Earthcausing an increase in the market capitalization of TerraClassicUSD and causing the price of Terra Classic to skyrocket.

However, the yield was unsustainable. Anchor’s reserves were depleted. And perhaps that’s why users suddenly started withdrawing TerraClassicUSD in large numbers – the initial catalyst that caused Terra Classic to collapse.

Many other risky cryptocurrencies offer high returns just by holding them. Mitigate this risk by researching where the money is coming from to pay the return. This way you can analyze whether the yield is sustainable. Avoid anything that seems unsustainable.

Risk 3: FOMO

Fear of missing out (FOMO) is perhaps the biggest risk for crypto investors. Even with their recent declines, cryptocurrencies like Bitcoin and Ethereum (ETH) have significantly outperformed most stocks in their history. And the lure of ultra-high yields like these can lead investors to invest in cryptocurrencies before they’re ready and before they fully understand what they’re investing in.

FOMO is an emotional response to a bullish thesis. We think something is about to come up fast. One of the best ways to combat this, then, is to spend time developing a bearish thesis – an explanation of what could go wrong.

Take Ethereum as an example. I think the Ethereum blockchain has a lot of potential in the world of smart contracts and decentralized applications. With its Ether token exchange at its lowest level since 2020, it would be easy to get FOMO right now with Ether, hoping for a quick rebound.

However, there is a big risk right now with Ethereum. This blockchain is transitioning from a proof-of-work blockchain to a proof-of-stake blockchain. Without getting into the weeds, let’s just say that tokenomics is changing. Rather than mining Ether using many computers to solve complex mathematical problems, nodes will stake Ether to process transactions. Ether is locked up for long periods of time, and holders join staking pools to participate and earn yield. This move to proof-of-stake really changes the whole playing field of Ethereum and it’s impossible to know for sure what the long-term impact might be.

Ethereum investors today must recognize that it is not quite the same Ethereum of the past. And that could impact future returns.

Just asking what can go wrong is a powerful deterrent to FOMO.

Avoid risk when investing in crypto

As we have seen, poorly designed tokenomics, unsustainable returns, and FOMO are three big risks when it comes to crypto. The first two risks are token-specific and can be mitigated by making sure you understand exactly how the cryptocurrency you want to buy works. The last risk is personal and is mitigated by developing an investment thesis on what can go well and what can go wrong when buying cryptocurrencies.

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