Risks of Cryptocurrency: Understanding the Dangers and Possible Solutions

This report discusses the risks and dangers associated with cryptocurrency, including encryption problems, hacking, irregular investment, scams, technical issues, and country-based changes. It also provides possible solutions to mitigate these risks.

WHAT ARE THE RISKS OF CRYPTOCURRENCY?
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Table of Contents
Executive summary....................................................................................................................3
Introduction................................................................................................................................4
Literature review........................................................................................................................5
Research methods.......................................................................................................................7
Risks of cryptocurrencies...........................................................................................................7
Possible solution of risk in Cryptocurrency.............................................................................11
Conclusion................................................................................................................................11
Reference..................................................................................................................................13
Appendix A..............................................................................................................................15
Appendix B..............................................................................................................................16
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Executive summary
This report is made in a draft form and deals with a very important topic called ‘Crypto
currency’. The implementation of cryptocurrency has brought several risks to the digital
world. This report will cover all those risks and possible remedies if there are any. There will
be a detailed discussion of possible risk assessment. When talking about crypto currency, it is
obvious that peer-to-peer internet network will also come in the discussion. A detailed
discussion about all the topics will be done below.
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Introduction
In this report, several risks and dangers are to be highlighted regarding the use of
cryptocurrency. But before that it is important to know what cryptocurrency is.
Cryptocurrency is a digital currency which is encrypted by using modern techniques to use it
digitally. It is basically used to regulate and generate units of currency that are used
nowadays. It checks and verifies the funds that are transferred to various banks by operating
independently of a central bank. There are few very important facts about cryptocurrencies. It
is evident that cryptocurrencies have become a global phenomenon in this century. Today a
lot of people know about this term but very few are familiar with how it actually works.
Some people even termed it as geeky. While few people who are associated with banks,
government field, and other fields knows about its importance very well. Cryptocurrency had
emerged as a side product of another invention, called the Bitcoin. With the invention of
bitcoin cryptocurrency came into existence. Satoshi Nakamoto, who is the inventor of bitcoin
has mention cryptocurrency as ‘a peer-to-peer Electronic cash system’ in one of his invention
documentaries. This digital cash has been furbished to work like a peer-to-peer network for
digital file sharing. Sometimes, cyrptocurrency is seen as a complex digital system but it also
can be used in a simple way if there is an adequate amount of knowledge in digital
networking (Narayanan et. al. 2016). As said earlier, it is dependent of peer-to-peer
networking system. Understanding and realising digital cash is important in order to get
access to cryptocurrency. One major problem that is faced in this field is that every payment
network needs to prevent the double spending and to prevent that one entity that spends same
amount of digital cash twice. Generally, this process is carried out by a centralized server
who keeps record about the current balances of each and every account. On the other hand, if
there is a decentralized network, there will be no existence of such servers. One must need a
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very single entity of the network to do the same job. In that case, every ‘peer’ in that network
system needs to have a separate list of all the transactions made at a certain time. It is also
mandatory to check if future transactions are valid or there is an attempt to double spend. In
centralized standard case it is usually a central body or authority appointed to declare the
correct state of balances from time to time. By this the census can also be achieved and
without a central authority it is not possible at all. But with the invention of cryptocurrencies
it is possible to achieve census without a central authority. This was the major innovation of
satoshi through his invention (Delmolino, et.al. 2016).
Literature review
It is very important to discuss how cryptocurrency works before proceeding with the
discussion of risk in cryptocurrency. There may be many working principles but here one
standard principle can be discussed.
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Figure 1: Working of cryptocurrency (Hileman and Rauchs, 2017).
This working principle is quiet simple if one has knowledge about digital cash transaction
system. The first step starts with a transaction request. After the request is done it is
broadcasted to the P2P network which consists of computers known as nodes. This nodes
checks the transaction if it is valid. If so, it then validates the transaction. The network of
nodes or computers then validates the transaction and the user’s status using some known
algorithms. After this process, a step is taken forward to verify the transaction (Hileman and
Rauchs, 2017). A verified transaction can involve cryptocurrency, contacts, records of all the
transactions and more relevant information. Once verified, the transaction is combined with
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other transactions. This helps to create a new block of data for the ledger (Park et. al 2015).
This helps in storing data for future use. After that the new block is then added to the existing
block chain. This is done in such a way that it is permanent and unalterable throughout the
transaction process. After that the transaction gets a green signal to proceed. And one it gets
the green signal, the transaction is done.
Research methods
It is known that cryptocurrency is a medium of exchange which can be created and stored
electronically, or more precisely, digitally in the block chains (Vigna and Casey, 2016). It is
generally done using encryption techniques to control the creation of monetary units. It is
also used to verify the transfer of funds and other valuable transactions. This information has
been obtained from various web sources as well as few citations.
In a most recent way, the internet has produced a various source for Bitcoin P2P software that
comprised of ‘nodes’ for broadcasting information about various relevant transactions. With
the discovery of asymmetric encryption, more information about cryptocurrency came into
existence. For research and practical purposes, this asymmetric information helps the
researcher in a good way as this information comes in bulk.
In digital world, all the information can be obtained digitally. Digital data is collected and
preceded with writing this report. From various government published articles, all the
information is taken and it is a great hope that this information will be relevant for this report.
The information of the central bank is necessary for this research as well. The central bank is
solely responsible for building a relationship between the digital banking system or the crypto
currencies and the traditional banking and investment system (Gandal and Halaburd, 2014).
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Risks of cryptocurrencies
This is the era of digital world where everything is done digitally, starting from digital cash to
digital gold. Nowadays, spending on digital gold has increased. Payment through mobile or
any kind of handy device has become easier in today’s digital world. This money is supposed
to be more secure than any other form from political influences. Taxes are easily calculated
through digital transactions. But like every digital field, risks have covered a part of
cryptocurrencies too (Gandal and Halaburda, 2016).
Problem with encryption
Digital currencies are actually encrypted to keep them secure. But still in some cases, like
cyber attacks and sharing data from not trusted network or unknown network can be
dangerous and can increase the risk in cryptocurrencies. There are potential drawbacks of this
encryption process as well. The coding which is used here is to identify the currency itself,
but not the owner of those currencies. In this case, whoever owns the code of encryption
becomes the owner of the currencies. This can lead to a very serious problem and the whole
digital economy can get affected by it (Hayes, 2017). There is a risk of total loss in case of
exchange account getting hacked. It is generally recommended to invest in off-line cold
storage rather than investing the crypto digitally. In theory, cryptocurrency can actually
become worthless. Cryptocurrency systems like the Bitcoin admit very much in their FAQ
pages. As a result, the interest of the investors on it can drop off. This can affect the overall
world economy. World economy can become so severe that it can affect cryptocurrency
value.
Risk of hacking
There is a risk of total loss in case of exchange account getting hacked. It is generally
recommended to invest in off-line cold storage rather than investing the crypto digitally. It is
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said that volatility is the part of the trading, so it cannot be considered as major risk. But
minor risks are transaction is always there. It can also be termed as high risk phenomenon in
whole economy. This can be explained with an example. Suppose an investor has the
investment going up by 4000% in a period of six month. In this case, money can come
instantly and later there will be a zero income. But the investor should know how to earn
profit at the right time by investing slowly and by not being greedy (Fry and Cheah, 2016).
Irregular investment
While investing, a fear of regulation happens. The investor may fear of certain things while
investing a lot of money digitally or making crypto money. There in uncertainties as the
investor does not know what the government fight do in future with the regulations. IT
protocols might change in future and value of currency can also decrease with time in future.
It is reported that the mainstream bankers of the world are already lobbying for few
regulations again digital cryptocurrencies. If these things work out in future for them, normal
investors will suffer a huge loss. The bankers are doing so because more and more money
from these banks are gradually moving to crypto banks and these bankers are facing a huge
loss. The investors need to be aware of any changes in regulations while investing money as
well as after investing (Ametrano, 2016).
Risk of scam
In today’s digital world, scam is a very big issue. Scamming became easy digitally than in
traditional form. There is an increased chance of scamming with the introduction of cryptos
like Bitcoins and altcoins. These are designed automatically to steal the investor’s BTC
through direct trading of BTC to those coins. The investor should properly investigate the
whole thing and the working principle is to be reviewed before investing. While investing a
huge amount of money in the form of cryptocurrencies, the investor should go through all the
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terms and conditions of the digital platforms. Sometimes, the investor himself or herself
doesn’t know that he or she fell in the grasp of scamming. When this investor realizes it, it
becomes too late (Andrews, 2018). Unlike banks, crypto money is not secured or insured in
case of loss and theft. No insurance and legal recompense is provided in cryptocurrencies. In
other word, the currency is not secured at all. The investor is actually taking a great risk by
keeping money digitally. This is mostly seen in case of crypto wallets. Crypto currency
wallets sometimes become complicated too. This is because of a constant try of making it
encrypted. The more encrypted a digital system is the more it will get complicated. All of
these crypto currency wallets have a ‘public key’ to receive money while they are provided
with a ‘private key’ to send money digitally.
Technical problems
A host of several currencies fall under the cryptocurrency banner. Bitcoin is the most famous
one among them. It has count of several currencies. Bitcoin generally involves computer
solving of transactions with a 64 digit solutions at a time. This is a big calculation and can be
wrongly dealt with sometimes due to technical problems. There is a currency drop off in
recent years due to Bitcoin. A single coin had worth £12,908 in last December. This can give
investors a huge profit and can increase greed in them (Watson, 2018).
Traditional and country based changes issue
The legal status of cryptocurrencies varies from country to country and it also depends on
different currency systems. It is still undefined in some countries or major changes have been
brought in between them. In that case, while these changes happen, hackers target big
investors. These hackers’ main target is to steal the investor’s crypto- money. The investor
must be specifically careful if he or she is uses. There is risk in cryptocurrency wallets too.
Keeping and using digital wallets have become a habit nowadays. As cryptocurrencies
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continue to dominate headlines, the wallet became famous in a go. People found it easier to
use digital wallets rather than keeping cash with them. The process of using wallet is smart,
time efficient and easy. Sometimes there are trust issues though. But in many cases, wallets
have proved to play a vital role in cryptocurrencies. The so called altcoins are supposed to be
risky enough because sometimes their prices are highly inflated. Investors may face problem
while storing the newly acquired cryptocurrencies which are not a straight-forward process
and sometimes not even secured. There are still trust issues in this case (Shapiro, 2018).
Possible solution of risk in Cryptocurrency
So far, different risks have been discussed above. These are standardized risks which can
happen anytime while using cryptocurrencies. Crypto currency wallets also come into this.
These wallets work as a public key which can be dangerous as well. But while sending
money they are provided with private keys. This can make the whole transaction a bit secure
in the initial level. Though secured, hackers are not trustworthy at any cost. They can hack
into the system anytime or during a big change in the system. Cyber crime is rapidly growing
in today’s world. Specially, with the rapid growth of digital transactions, crime takes big
steps. Safeguards are necessary in all the level of transaction. In every step, it is necessary t
review and checks the process to avoid risks. Digital transfer is done with the help of apps
even. The apps need to be certified and should have certain authorizations. Investors must be
very careful while using the online versions as well. Sometimes, hackers keep a good track of
each and every transaction done (Chen et.al. 2018). Even the investor must be very careful
while using peer to peer platform in order to sell and buy crypto currencies. The investors
sometimes don’t even know who he might be dealing with. It is difficult to know who is on
the other side because the system is fully end to end encrypted. Even the dealer doesn’t know
who the investor is in some cases. It might raise a trust issue in that case. The investor has to
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invest blindly. As a result, sometimes, scam and fraud issues arise regarding investing on
digital currencies and digital gold ((Hileman and Rauchs, 2017).
Conclusion
It can be concluded that digital currency keeping has now became a fashion for the investors
as well as common people. Risk assessment has been done to find out relevant information
and risk regarding this topic. While investors find a way to invest in different places, digital
platform like crypto currency gives them a scope to invest whenever they want and wherever
they want. As crypto currency gained fame in the world economy many people gets interest
in it. The curious nature of people makes them use crypto currency and digital systems to
invest. But as discussed above, like every digital platform, it also faces challenges. The
investors feel it risky sometimes. After investment it becomes a headache for the investor if
they have invested rightly or not. Cyber attacks are other issues of crypto currency.
Encryption problem exists in all of the digital platforms established so far. There is always a
positive chance of hacking. Apart from that, risk of hacking and irregular investment can
create a serious downfall in the whole cryptocurrency system. Risk of spam is increases in
case of currency exchange. Traditional methods were slow but safe. On the other hand,
crytocurrency method is still not safe. Change of currency from one country to other; create
an active platform for scam and loss. After all, value of money gets affected.
But cyber security system is also trying hard to encrypt these systems even more. Cyber
security is getting stronger day by day and one can hope for a risk free crypto currency
system in future. More precisely, there may be a major change that can take place in future to
change the encryption systems. As a result, there will be huge change or renovation in the
digital world. It is important to build a strong digital platform where investors can invest
without any fear. Rate of loss needs to be decreased in future so that more investors can
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invest digitally. Investing digitally can help in building world’s economy strongly in the
coming years as it is time effective as well as a cheap method to implement.
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Reference
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Vigna, P. and Casey, M.J., 2016. The age of cryptocurrency: how bitcoin and the blockchain
are challenging the global economic order. Macmillan.
Delmolino, K., Arnett, M., Kosba, A., Miller, A. and Shi, E., 2016, February. Step by step
towards creating a safe smart contract: Lessons and insights from a cryptocurrency lab.
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Park, S., Pietrzak, K., Alwen, J., Fuchsbauer, G. and Gazi, P., 2015. Spacecoin: A
cryptocurrency based on proofs of space(Vol. 528). IACR Cryptology ePrint Archive 2015.
Gandal, N. and Halaburda, H., 2014. Competition in the cryptocurrency market.
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effects? Competition in cryptocurrency market. Games, 7(3), p.16.
Hayes, A.S., 2017. Cryptocurrency value formation: An empirical study leading to a cost of
production model for valuing bitcoin. Telematics and Informatics, 34(7), pp.1308-1321.
Hileman, G. and Rauchs, M., 2017. Global cryptocurrency benchmarking study. Cambridge
Centre for Alternative Finance.
Fry, J. and Cheah, E.T., 2016. Negative bubbles and shocks in cryptocurrency
markets. International Review of Financial Analysis, 47, pp.343-352.
Ametrano, F.M., 2016. Hayek money: The cryptocurrency price stability solution.
Andrews, A., 2018. Bitcoin: The Complete Guide to Understanding Bitcoin Cryptocurrency
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Watson, L., 2018. Cryptocurrency Investing Bible: The Ultimate Guide to Unlock the Secrets
of Bitcoin, Blockchain and Cryptocurrency, Bitcoin Investment Tips for Success.
Watson, L., 2018. Blockchain: The Ultimate Guide to Understanding the Technology Behind
Bitcoin and Cryptocurrency (Including Blockchain Wallet, Mining, Bitcoin, Ethereum, Litecoin,
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Shapiro, D.C., 2018. Bitcoin Loans and Other Cryptocurrency Tax Problems. Journal of
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the case of CRIX and Bitcoin.
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