An asset class that allows users to transfer coins through a blockchain system, cryptocurrencies have been described as digital disruptors to standard financial institutions. Cryptocurrency differs from traditional banking in that no one entity is in charge of the currency, and it operates through a system of trust among members.
Cryptocurrency is also an investment with many risks. One risk is that it has only recently been regulated, and much of this regulation is unclear. For example, the currency can be defined as both a commodity and a stock.
Another major risk is that cryptocurrency is not tangible, and therefore, it is difficult to find insurance coverage. Since the currency is digital and is not actually property, it cannot be liquidated. While some companies will insure cryptocurrencies, it is difficult to do so.
Moreover, cryptocurrencies are both volatile and hard to convert to cash. Cryptocurrency transactions take place between users with no traditional financial institution acting as an intermediary. Without the backing of a central bank, cryptocurrencies have to pay customers out of their own funds, which is risky. Moreover, the volatility of certain cryptocurrencies contributes to this illiquidity and risk.
Finally, as with all technological advances, security standards ensure that these investments are safe online. However, no standard exists in the cryptocurrency industry. Wealthy cryptocurrencies can afford to protect their customers with top-of-the-line measures, but consumers may not receive the same quality of security with other cryptocurrencies.
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