Key risks connected with digital assets and a way to overcome them.
Blockchain is a distributed ledger technology that stores copies of databases. Blockchain is decentralized, so information is not stored in one place; it is present on many computers.
Blockchain is a distributed ledger technology that stores copies of databases. Blockchain is decentralized, so information is not stored in one place; it is present on many computers. Even though this technology is being actively implemented in various areas of life, its application has become incredibly effective in the field of digital assets. We are talking not only about cryptocurrencies but also about tokens, which are also rapidly gaining popularity. For example, we are talking about NFT and security tokens, which have recently aroused tremendous interest from individuals and businesses.
If you are considering working with tokens or cryptocurrencies, it is crucial to be aware of the risks with digital assets. Let's talk about the main digital assets issues that must be considered.
Top digital assets risks associated with cryptocurrencies
Cryptocurrencies have attracted a lot of attention. Many people and companies have invested in them, and some have even sought to create their own cryptocurrency. However, right now, cryptocurrencies are going through hard times. If you intend to work with these assets, it is important to assess the risks with digital assets.
Rate volatility is the main problem for crypto investors. Cryptocurrency can skyrocket in price and then collapse rapidly. Therefore, such assets cannot be called a stable option for savings.
In 2014, the famous Mt.Gox heist took place, due to which a significant part of the Bitcoin market capitalization was destroyed. It wasn't theft; it was a suicide break-in. That is, crypto coins were not stolen; they simply became inaccessible. Poly Network faced similar problems in 2021. Hence, the operational risks of digital assets are essential to consider.
A common problem with digital assets is fraud. This is especially true for ICOs. According to the Wall Street Journal, there were 1,450 digital asset offerings in 2018, with 271 showing signs of fraudulent activity. For example, the researchers noted that in a number of cases, ICOs were transferred from one asset to another. That is, the scammers simply changed the name of the coin and offered it as collateral for the market. Today, ICOs are a thing of the past as they are replaced by STOs mostly. However, if you go to any site that lists ICOs, you will see many offerings from unnamed projects.
There are over 7,000 different cryptocurrencies, but how many projects are actually famous? SEC Chairman Gary Gensler said serious competition between several thousand coins is impossible. Gensler was right since, as of 2022, there are at least 1000 projects that developers no longer support due to inappropriateness. At the same time, not only cryptocurrencies, whose price is determined speculatively, faced failure. The projects of many stablecoins, especially those tied to gold, have also failed.
This is a relevant issue for stablecoins since there are reasonable doubts that the declared assets actually back them. For example, in 2019, the team of the largest stablecoin, Tether, announced that their cryptocurrency was 100% backed by the dollar. This turned out to be false, causing Tether to face sanctions from the US government. Moreover, it has been proven that the price of Tether was manipulated to support Bitcoin. In July 2021, a study proved that the deposit was not properly stated. Not all stablecoins have such problems, but the very fact of the existence of such digital assets risks is vital to consider.
Bitcoin and Ethereum are energy-intensive systems, which causes related problems. According to the latest estimates, BTC mining generates about 75 million tons of CO2 per year. Such figures can be compared with the carbon footprint of entire countries, such as Colombia. The energy consumption for mining Bitcoin is comparable to the annual energy consumption of Malaysia. It has been proven that the amount of electricity required to conduct just one transaction in the Bitcoin network is equivalent to the energy consumption of a US household in 59 days. The solution to this problem could be the transition to the Proof-of-Stake algorithm, and Ethereum has already planned it.
As of Q2 2021, the total stablecoin fee was $497 million, but the volume of transactions continued to grow. The introduction of the Ethereum 2.0 protocol is an attempt to reduce fees; however, there is an unsolvable problem of the direct dependence of the coin's price and the fees' size. The more expensive Bitcoin, Ethereum, or other cryptocurrency costs, the higher the transaction fees will be accordingly.
The ambiguous position of countries
In many countries, there is still no unambiguous position regarding cryptocurrencies, and some states have decided to ban any transactions with them completely. Any adverse decisions of governments directly affect cryptocurrencies. For example, when China banned bitcoin mining, the network bandwidth dropped by 25%. Capacities have gradually recovered, but the risks of such drawdowns remain in case of a similar ban from other countries.
The most important nuance for trading digital assets is time. Cryptocurrency markets operate 24/7, and price changes can start at any moment. Therefore, if you plan to invest a large amount in cryptocurrencies, you need a trading platform that works around the clock, seven days a week.
Top risks associated with tokens
Tokens have always aroused interest as an investment asset, and against the backdrop of declining prices for cryptocurrencies, the interest in them has grown. Therefore, many companies today seek to issue such digital assets. However, certain digital assets risks need to be taken into account.
Wrong audience selection
If a company decides to raise funding through security tokens or sell intellectual property through NFT, it is necessary to choose the right audience. If you make a mistake, you will not be able to attract investments in the required amount. You need to understand your potential investors and what channels are best for conveying your message to them.
Related: Choosing the right investor audience: 5 main principles to navigate by
Not only must you choose your audience properly, but also perfectly convey your idea. Tokens are modern digital assets, and many people know about them superficially at best. Often people do not understand how it even works, how to store tokens, and what they can do with them in general. In this case, competent communication with customers and the ability to convey all the benefits that these digital assets give are extremely important. The risk of working incorrectly in this direction may leave the company without the desired result.
The risk of theft can be divided into two types – theft of the tokens themselves and the assets to which they are tied. For example, if security tokens are backed by a physical asset (such as a luxury item), that asset could be stolen, in which case a security issue would arise. In addition, when it comes to NFTs, copyright infringement is possible. The tokens themselves can also be stolen. This risk is exceptionally high for companies that do not adhere to cybersecurity rules.
Risk of missing out
In the case of tokens, time also plays a critical role. It is important for companies that plan to raise investments through STOs and investors who want to buy tokens to do everything on time. Companies may miss the right time and face high competition in the market. In this case, breaking through to the top of popularity will be very difficult. Investors may miss the opportunity to buy tokens at a relatively low price.
Digital assets are a popular investment target. They open up tremendous opportunities for both companies and investors. However, before you start working with them, it is essential to remember that there are significant digital assets issues that can lead to the failure of the whole business idea. Therefore, it is important to choose the right assets and take into account the risks so that investments in such projects are successful for all parties. Stobox offers advice on digital assets. Whether you want to issue your own tokens or raise funding, we are ready to help you succeed and avoid all the digital assets challenges described above. Contact us to find out more.
What are the main risks associated with cryptocurrencies?
Cryptocurrencies are going through hard times right now, and investing in them is associated with numerous digital assets challenges, including volatility, high commissions, dissatisfaction from regulators, the presence of real backing, etc.
Are the risks associated with tokens the same as those associated with cryptocurrencies?
Some risks, such as the risk of theft, are indeed similar; however, tokens and cryptocurrencies have many differences in this regard. Tokens are less subject to volatility, do not require lightning-fast trading decisions, and have real asset backing.
How to avoid the risk of failure when issuing tokens?
Behind each token, there should be an original business idea. In addition, you must understand who your audience is, calculate the tokenomics, prepare technically for the issuance of tokens, and plan marketing activities.