Since the beginning of the crypto market with the first ever cryptocurrency, bitcoin, it has always been expected to grow. However, the trading costs of cryptocurrencies skyrocketed in 2021, with bitcoin touching it’s all-time highest price.
During the year 2021, bitcoin, followed by Ethereum and Binance coins, has drawn the attention of investors worldwide. Moreover, about 1000 new types of cryptocurrencies were added to the list of crypto every month in 2021 alone.
Such an immense increase in the number of all different types of cryptocurrencies has ultimately made the management of cryptocurrencies a tough job. However, this also posed a risk for harder-to-tackle challenges that have gradually surfaced.
A few challenges associated with the rapidly growing crypto market that risk managers need to be aware of are listed below:
The anonymity of cryptocurrencies
Cryptocurrencies were developed to be a safer and more versatile form of money than fiat money. In addition, decentralization in crypto transactions was meant to provide faster transactions at lower costs.
However, the current situation seems to be showing somewhat different results. Where fiat money is regulated by an intermediate or center party, i.e., the central bank, it is relatively safe for consumers. This is because every regulation passed regarding fiat money is by the central bank and the rule of law.
On the contrary, technological updates and increased anonymity of cryptocurrencies have set up a ground for various illegal activities like money laundering. The digital nature of cryptocurrencies allows the exchange of illegal services and goods without needing the physical presence of those involved. For the same reason, the chances of criminals being caught for their heinous acts are also meager.
Business analysts have concluded that China banned the use of all cryptocurrencies due to the reasons mentioned above.
The first step to acquiring a cryptocurrency is mining. Mining helps with acquiring new crypto coins by solving highly complex hash algorithms. After the verification, a crypto coin is successfully mined. Then, the miner receives a specific amount of crypto coins, and the process is repeated.
The process of mining a crypto coin takes up vast amounts of energy, i.e., electricity. The cost of electricity resources alone costs way more than the reward you get after successfully mining a coin.
In addition to energy resources, the hardware required for mining is also costly. This also reduces the sustainability aspect of cryptocurrencies, which is something to be worried about.
New applications and software have been introduced to assist the trade journeys of investors.
Among this software, the bitcoin trading software is a notable name. It is famous for automatically swapping cryptocurrencies with other available traders, helping them benefit from the value fluctuations in the currency. Moreover, investors can easily track current prices and trade the currencies on demand.
Scams and financial frauds
Decentralization of crypto transactions has gradually begun to pose an indirect threat to the security of investments and crypto assets. This is due to the absence of any accountability for blockchain technology.
The inability to trace transactions has paved the path to various scams and financial frauds such as money laundering. Moreover, the anonymity aspect of crypto transactions is also suspicious.
The transactions may be untraceable by the investors, but they aren’t hidden from the crypto exchanges. Therefore, it is a challenge for lawmakers to hold crypto exchanges accountable for the information they hold.
Furthermore, according to business analysts, two significant aspects have turned crypto money laundering into a reasonably easy task. First is the anonymity factor that has been discussed previously. It opens the doors to manipulation by criminal organizations.
Second is the absence of any uniform regulations across the globe. On the contrary, in the presence of uniform and fair regulations regarding cryptocurrencies, anti-money laundering (AML) programs would function effectively.
Cryptocurrencies are the future of technology in business. The public has played a very significant role in the rapid growth of cryptocurrencies. The increasing popularity has also increased the overall global adoption of cryptocurrency.
Despite being around for more than a decade now, crypto still seems new to the community of technological upgrades. As a result, the market is yet to experience the natural consequences of adopting cryptocurrencies.