Communicating with Clients About Cryptocurrency Risks: A Financial Practitioner’s Guide
Overview of Cryptocurrency Risks
Even though the prices of Bitcoin, Ethereum, and most other cryptocurrencies have dropped from their peak, the asset class is still well-liked, particularly among investors who are more open to embracing new technologies.
One-third of men under 50 and more than 25% of Americans have traded or used a cryptocurrency.
The public has realised that cryptocurrencies are risky, despite this engagement, and as a result, investment has decreased. The majority of Americans—75%—
state that they lack faith in the security and dependability of cryptocurrencies. 1. With waves of sell-offs, the total market value of cryptocurrencies has dropped to $1.39 trillion from a peak of $2.62 trillion on September 30, 2021, or roughly 50%. 2.
Financial advisors should, when working with clients who are interested in the technology,Make sure they are aware of the possible drawbacks. Investment returns may be impacted by these risks.
As a result, investors ought to modify their cryptocurrency holdings in line with their level of risk tolerance.
Recognising the Risks of Cryptocurrency Being a relatively new and distinct asset class, cryptocurrencies are vulnerable to numerous risks related to market cycles, legal restrictions, and cybersecurity.
Significant volatility can occur in cryptocurrency, even with the major coins. For instance, the price of Bitcoin fluctuated between November 7 and November 14, 2023, rising from $34,620 to $37,970 and then falling back to $36,500. 3.
There aren’t many other investments with such a high degree of volatility. They are now susceptible to a variety of market manipulation techniques, such as pump-and-dump schemes, painting the tape, short squeezes, and wash trading.
Financial Statement Analysis a Practitioner’s Guide: More Than 25% of Americans
The legal and regulatory aspects of cryptocurrencies present an additional risk. Tax and regulation changes may have an impact on the costs and value of
The Securities and Exchange Commission (SEC), the federal securities regulator in the US, has been debating whether to classify Ethereum, Ripple, and other widely traded assets as securities, among other new cryptocurrency regulations. Investors may find it unfeasible or illegal to buy cryptocurrency on the open market as a result of such a classification, or they may be forced to choose between registering the securities and acting as broker-dealers, which is an expensive process.
4 5 6 “Guide to Broker-Dealer Registration,” U.S. Securities and Exchange Commission. The security risks associated with locking down and using cryptocurrency wallets for transactions are another noteworthy worry. Crypto wallet addresses are lengthy strings, and cryptocurrency transactions can be transferred instantly and without delay.
of alphanumeric characters, which facilitates the transfer of assets to the wrong person and makes investors easy prey for thieves. Numerous cryptocurrency exchanges have experienced hacks and data breaches that have defrauded users of millions to billions of dollars. The so-called “whales,” or large investors, have been intimidated or forced to surrender their cryptocurrency wallets.
Access credentials for self-custody wallets—wallets maintained independently from third-party services—are prone to being lost or mishandled.
Investors who mistype their receiving addresses and lose their cryptocurrency forever due to deleted files or thrown away papers that contained their wallets’ private keys and seed phrases are the subject of countless anecdotes. Faceless cryptocurrency scams have cost billions of dollars in losses.
Crypto services, in contrast to banks, do not provide physical locations for money withdrawals, which Informing Customers of the Risks Associated with Cryptocurrency
Financial advisors can inform clients about the dangers of cryptocurrency investing using a variety of techniques and tools. Videos and readings can be found all over the internet.
publications and books on topics pertaining to the cryptocurrency industry.
Informational materials such as fact sheets are provided by financial institutions, governmental bodies, and policy making entities, which highlight issues that beset digital assets.
The difficulties involved in trading cryptocurrencies can be seen through interactive wallets, paper trading, and simulation tools.
These sources can display the challenges associated with configuring, safeguarding, and using wallets as well as the real-time price slippages and volatility swings that cause daily turbulence in the cryptocurrency markets. Evaluate the Risk Tolerance of the Client
It is crucial to assess a client’s risk tolerance when they are contemplating cryptocurrency. Considering the significant swings in cryptocurrency prices, clients
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