Buyer Alert: Things to look out for in cryptocurrency

The recent crypto crash is the talk of the town, so it is imperative that investors understand what they are buying into when entering the market.

Cryptocurrency is perhaps the most well-known application of blockchain technology and was initially touted as a foolproof system.

However, recent vulnerabilities that have surfaced have reinforced the idea that investors should be aware of some potential pitfalls.

1. High volatility

It's been a wild ride even for bitcoin, the most prominent of all cryptocurrencies. Just this year alone, it’s reached values of over $80,000 twice, while plunging to just over $40,000 in between. Such swings are par for the course and akin to investing in risky financial products, so know what you are signing up for.

Seemingly stable cryptocurrency-related businesses can also fold with little notice, as happened to the cryptocurrency trading platform Torque. It was paying out monetary rewards like clockwork until it suddenly stopped, leaving investors in the lurch.

The man who ran the company says Torque’s downfall was due to a rogue employee executing unauthorised trades that cost the firm significant losses, but it’s still unclear what exactly went down, and investigations are ongoing.

Similarly, the recent crash involving the algorithmic stablecoin UST shocked investors when it was depegged from the US dollar and had its value fall to $0 within the span of a few hours.

In this specific example, the ‘stablecoin’ failed in its promise as a guard against volatility.

Mind you, UST wasn’t a minor player in the crypto ecosystem – both UST and LUNA were ranked in the top 10 at one point. If such a behemoth in the crypto space can unravel within the span of a week, what of lesser-known cryptocurrencies?

2. Outright scams

Then there are the outright scams that prey on victims’ greed and perception that the crypto space is a get-rich-quick wonderland.

A recent one capitalised on the popularity of Squid Game by naming itself after the Netflix hit show. People who bought the SQUID token saw their value skyrocket and it was all good, except for the inconvenient fact that they couldn’t sell their coins. The ruse was so obvious Gizmodo published an article titled “New Squid Game Cryptocurrency Launches as Obvious Scam”, pointing out a fake endorsement from Elon Musk and a poorly written white paper, among other tell-tale signs.

Indeed, a few days after the article was published, The coin’s value crashed after its creators ran away with investor proceeds in what is known as a “rug pull”.

Do your research before plunging in. And no, a few articles from reputable news outlets don’t guarantee that what you buy is legit.

Another type of scam is a spin on the classic wire transfer scam, where the victim is persuaded to transfer money to the scammer. Only this time the transfer is through cryptocurrency, because the transaction is harder to trace and there won’t be an alert bank employee who can smell something fishy going on and intervene.

3. Hacked wallets

Cryptocurrency is big money these days, and hundreds of millions of dollars worth of coins have been lost to hackers targeting crypto platforms and wallets.

Bad actors have various ways to steal digital currencies, ranging from sophisticated attacks that exploit system vulnerabilities to more “low-tech” methods like phishing and stealing passwords.

For an added layer of security, consider getting what is known as a cold wallet, akin to a thumb drive, which stores your cryptocurrency completely offline.

4. Forgotten password

Sometimes, you are your worst enemy. Some people have been unable to access millions of dollars worth of cryptocurrency because they’ve forgotten their passwords to their digital wallets or lost the piece of paper upon which they were written.

It must be a special kind of pain to be so near, yet so far from life-changing wealth.

There’s no perfect solution to this issue. Memorise or have just one copy of your password, and you risk forgetting or losing it. The more copies of your passwords you make, the higher the chance it’ll be discovered and stolen. At least now that the worth of cryptocurrency is so well-known, it’s much less likely you’ll treat your password casually.

5. High potential, high risk

Cryptocurrencies look set to gain in importance. So it’s completely understandable if you are exploring the world of crypto and are excited by the high potential of this tech. However, being aware of the risks involved and how to manage them is essential and will ensure that your crypto journey doesn’t end up as a cautionary tale.