Investment assets are divided into three main types – low-risk, medium-risk and high-risk. Each has its own characteristics, but many investors are primarily interested in high-risk-associated ones. The reason is obvious – such assets have the greatest profit potential. High-risk assets usually include cryptocurrencies. There are several reasons why such assets are considered high-risk – high volatility, the risk of fraud, and much more. Before investing in crypto and other high-risk assets, these factors are important. In this article, we will talk about types of risk assets and why security tokens are less risky assets than cryptocurrencies.
What asset is considered high-risk?
First, it is critical to know what a risk asset in banking is and what the types of risk assets are. Risk in investments is the possibility of losing your investment or getting a much lower return than expected. High-risk assets are those for which the projected income is more than 30% in the short term. Such assets may have several risks. The main ones are as follows:
- Risk of low liquidity.
- The risk of non-payment.
- The risk of high volatility with a sharp price movement.
Specifically, concerning cryptocurrencies, the risks are associated precisely with high volatility. Of course, you can make money on crypto, and many investors do get their profit. However, a large number of people lose money. This is because many simply do not get rid of their assets in time due to the wrong strategy or their own psychology. A fairly common problem is a person simply not daring to sell an asset, even when there are all the prerequisites for this.
However, not all digital assets are as risky as cryptocurrencies. For example, security tokens are also digital assets, but due to a number of their features, the risk of investing in them is much lower compared to cryptocurrency. Next, we will analyze the main risks associated with investing in traditional crypto assets.
Key risks when investing in cryptocurrencies
There are many risks connected with cryptocurrencies. It is imperative to consider them before investing your money in crypto. Asset risk management is aimed at controlling them, but the crypto sphere is too unpredictable anyway. Consider the main risks associated with this type of digital asset.
Cyber attacks are a common problem for cryptocurrencies. Many exchanges were hacked, and this brought them even to bankruptcy. For example, a famous case occurred in 2016 when hackers stole over $150 million from the DAO hedge fund. The Bitfinex cryptocurrency exchange was also hacked. The attackers managed to withdraw more than $70 million from it.
In many states, the regulatory framework for cryptocurrencies has not yet been created. Accordingly, digital assets are in a semi-legal position. This means that investors are deprived of basic protections, such as asset risk insurance or the ability to go to court. In addition, the anonymity of this type of digital asset, in this case, is harmful since it is almost impossible to track the movement of funds.
However, the problem of legal risks is relevant not for all types of digital assets. For example, in the case of security tokens, it was successfully solved. Such tokens are considered analogies of securities; accordingly, they are subject to the laws of the jurisdictions where they were issued. In case of fraud with security tokens, the investor can apply to the financial regulator or sue.
Crypto exchanges shut down
From 2017 to 2022, about 48% of crypto exchanges closed. Unfortunately, there were many promising platforms on the list. Some clients did not have time to withdraw fiat money or cryptocurrency from their accounts. As a result, funds were lost. In some cases, exchanges were closed due to hacker attacks, but sometimes, there were other reasons. For example, crypto exchanges were often closed due to unprofitability.
There may also be technical failures. Not all crypto exchanges ensure the capital of clients. Sometimes, investors may be left without investments only because of a technical failure. At the same time, imperfect software and related problems also cause the closure of exchanges.
No indemnity guarantees
After the client has replenished the account on the cryptocurrency exchange, they can only rely on the integrity of the trading platform. All assets actually belong to the crypto exchange; it exercises control over the funds. At the same time, the provision of guarantees is a purely voluntary program; not every exchange offers it. Moreover, even those who offer specific warranties cannot always fulfill their obligations. For example, customers did not receive payments after the MtGox crypto exchange was hacked in 2014. Despite the assurances of the exchange that it would return everything, users were left without money, and the business went bankrupt.
The main problem with cryptocurrencies is high volatility. These digital assets often defy analysis. Unpredictable market movements may occur. For example, one positive piece of news can lead to a significant jump in the market, and after a few hours, there will be negative news, leading to a market crash.
Cryptocurrencies (except stablecoins) are not backed by anything, and their price is determined speculatively. This also made them a very convenient asset for implementing the Pump and Dump scheme. The scheme is run by a group of investors who buy a digital asset in large quantities, stimulate its growth, and then sell the cryptocurrency at a certain point, which leads to its collapse. Accordingly, the organizers of the scheme receive the maximum profit. Also, some traders manage to earn something by selling the asset in a timely manner. However, most people are left with nothing.
Initial Coin Offering (ICO)
Government officials in many countries warn that everyone who invests in ICOs must be prepared for the loss of their investment. Unfortunately, in most cases, ICOs are not transparent, and many of them are fraudulent projects.
However, there is a certain solution in this area. ICOs have been replaced by Security Token Offerings (STOs). Such an offering is more like an IPO. It is carried out in accordance with the rules of financial regulators, under their direct control. Therefore, investing in them is much less risky.
How to avoid the risks associated with cryptocurrencies?
The risks in the field of cryptocurrencies are very high. It is especially tricky for beginners who cannot immediately understand the features of the crypto market. If someone wants to invest in digital assets in 2022, it is better to choose less risky assets – security tokens or NFTs.
The issue of security tokens is carried out as part of asset tokenization, that is, the transfer of physical assets to the blockchain. You can tokenize a wide variety of assets, from company shares to a barrel of oil or a square meter of real estate. A security token is a less risky asset than a cryptocurrency for a number of reasons:
- A security token is recognized as a security and is regulated by countries' financial regulators. Tokenization works at the intersection of crypto and traditional finance.
- Investors can receive real security guarantees and qualify for risk asset insurance.
- High liquidity. It will not be difficult to sell a token at any time due to the emergence of a secondary market (including thanks to DS Swap by Stobox).
- Security tokens are similar in characteristics to traditional shares. In addition to directly speculative investments, here you can count, for example, on profits from dividends.
- Possibility of fractional ownership. By investing in security tokens, you buy a certain share in a company or in an object and receive income from the price increase or the profit that the underlying asset brings.
Security tokens can become a reliable alternative for people who want to invest in digital assets but are not ready for high risks. If you wish to issue your own digital assets that would interest investors, we will be happy to help you set all processes. Sign up for a free consultation today!