Over the last decade, cryptocurrencies have surged in popularity, and practically everyone is talking about them or investing in them. On the other hand, Cryptocurrency investments are unlike any other in the financial system. They are prone to wild fluctuations and defy conventional investment trends.

The regulation of cryptocurrencies is still a work in progress. Although the regulations are uncertain, prudent cryptocurrency investors should register their holdings as foreign assets.

There are over 10,000 cryptocurrencies and many cryptocurrency exchanges to choose from, with more being introduced daily. That's a lot to process, especially for new investors. This article will discuss the most significant hazards that new and seasoned investors should be aware of in this volatile market. Unbacked currency, Bitcoins, are subject to extreme price fluctuation.

Other concerns include the environmental impact of many crypto assets' systems and public policy issues such as their usage for cybercrime, money laundering, and ransomware.

In his youtube channel, Nathan Sloan explains in detail the biggest threat investors are facing. 

 

Wider economic conditions

The concept of decentralization is key to the cryptocurrency sector. Bitcoin is digital money that does not rely on a centralized authority such as a government or bank to function. As a result, the crypto community can fall into the trap of believing it is immune to what is going on in the rest of the world. The issue in that thinking is that as cryptocurrency grows more mainstream, the wider economy becomes more important

The recent crash brought this home. The Federal Reserve's decision to reduce different pandemic-related economic stimulus initiatives contributed to the recession. The Fed's actions to combat increasing inflation encouraged investors to flee higher-risk assets such as bitcoin. Tensions between Ukraine and Russia have exacerbated global economic uncertainty.

Scams and fraud

According to Chainalysis, a crypto analytics business, crypto criminals stole a record $14 billion in cryptocurrency last year. In a North American Securities Administrators Association poll, investments linked to cryptocurrencies and digital assets ranked first on the list of investor dangers.

Criminal behaviour erodes investor trust and costs ordinary citizens' money. Furthermore, it stifles bitcoin adoption by making institutional investors apprehensive of becoming involved and retailers and shoppers less eager to accept cryptocurrencies as payment.

The potential collapse of Tether 

Tether is most likely one of the lawmakers' key reasons to control how stablecoins operate. Concerns about Tether's short-term debt prompted Jim Cramer to advise his viewers to liquidate their cryptocurrency in October. 

Stablecoins are cryptocurrencies whose value is linked to another commodity, such as gold or, in the case of Tether, the US dollar. Each USDT issued should always be worth one dollar. Tether is a fiat-backed stablecoin, which implies it should have enough money in the reserve to support each token created.

According to Tether's most recent report, only 10% was for cash and bank deposits. Almost half is in commercial paper, a sort of short-term debt, with the rest in money market funds and government bills. Competitors want to know how that commercial paper is distributed, and they doubt Tether's ability to support USDT in the case of a Tether run.

Increased regulation

The Treasury wants checks to verify that stablecoins have enough reserves and more transparency about holding that money. What is unknown is what will happen to the bitcoin market if Tether fails to achieve whatever new rules it sets. 

Authorities in the United States have stated that they do not intend to follow China's lead, but lawmakers want to impose stronger controls. One source of concern is that some crypto initiatives provide bank-like services, but are not subject to the same regulations as banks. Another issue is that some cryptocurrency initiatives are similar to stock investments, but lack the same reporting and transparency rules that prohibit insider trading and market manipulation.

The threat of increased regulation has hung over bitcoin for quite some time. Nations worldwide debate how to deal with this massive sector without harming it. When China tightened its grip on cryptocurrency last May, values plummeted precipitously. The issue is that the cryptocurrency business is now worth roughly $2 trillion. It's becoming more well-known, and many ordinary investors have poured money into numerous crypto initiatives. 

Standard risks

Blockchain technologies expose organizations to risks similar to those connected with current business operations, but they introduce suggestions for which entities must account.

Risks of value transfer

Blockchain allows for peer-to-peer value transfer without the use of a central intermediary. Assets, identity, or information could be the value transferred. Under this new business model, the interacting parties are exposed to new risks previously managed by central intermediaries.

Smart contracts can encode complex corporate, financial, and legal agreements on the blockchain, posing the risk of mapping these agreements from the physical to the digital environment.

Money Laundering

Cryptocurrencies are widely believed to empower criminal organizations with new ways to commit fraud, money laundering, and other financial crimes. Most cryptocurrency investors may be unaffected and do not want to utilize this new technology to perpetrate such crimes. Investors who are the unlucky victims of financial crime, on the other hand, are unlikely to have the same legal choices as ordinary fraud victims.

When a cryptocurrency exchange, for example, is hacked and customers' funds are stolen, there is frequently no standard mechanism for recovering the funds. By purchasing and retaining bitcoin assets, digital currency investors take on a certain amount of risk.

Shifu Digital Youtube channel discuss in detail the Scariest Legal Threats to Cryptocurrency.

 

What Are the Benefits of Cryptocurrency for Financial Institutions?

Crypto firms are currently unable to provide standard cash management products and are willing to form a partnership with a financial institution. Some of these crypto firms will obtain their banking licences, but most will seek to work with a well-established financial institution. The collaboration allows the financial institution to keep its core deposits while also providing an innovative offering to its consumers. The financial institution will be able to continue doing what it does best while also providing expertise on banking regulations and operations to the partner.

Because there are few financial institutions in the area, there is a chance to profit from this expanding trend. The timescale will be accelerated if there is a big, persistent crash or other bad events in the crypto ecosystem. Future regulation will level the playing field and reduce the danger of financial institutions engaging with a crypto firm. It will also make it more important for crypto enterprises to work with someone who has a robust compliance procedure.

How Financial institutions can help?

Financial institutions must choose a leader who can analyse and monitor the shifting landscape and push new initiatives to embrace the upcoming crypto change fully. This position may be referred to as a Chief Innovation Officer, Emerging Risk Officer, or another title by the institution. Whatever the title of the position, it is vital that they are in charge of the following:

Watch what's going on with Central Bank Digital Currencies (the US and other developed countries). Keep an eye on the finance scene and look for strong companies to collaborate with. Establish governance, which includes risk appetite, the formulation of cryptocurrency policies, and continuing oversight. Stay up to date on crypto regulation and SEC action by working closely with the financial institution's compliance management system. Perform risk evaluations for new products and partnerships. 

How to Get Ready for Cryptocurrency Investor Regulations?

Whatever future regulation may look like, experts say there are four things crypto investors can do now to be prepared:

Maintain your investment strategy.

Whatever is going on in the press or the White House conference rooms, sticking to your approach is probably the wisest course of action. Crypto investors should think about their plan in the same way they think about the stock market: you shouldn't stop contributing to your Roth IRA or 401(k) because of a bad day or news, and you shouldn't significantly change your crypto approach either.

Keep track of everything.

A cryptocurrency portfolio tracker can perform the work for you and verify that your records are accurate. This tracker is especially beneficial for more active traders. A tracker is a third-party tool that you can connect to your wallets and use to pull data and display your gains, losses, and other information about your activity and holdings. Some will keep track of price fluctuations, autofill tax forms, and warn you if you have a negative balance.

Fill up your tax forms to report your earnings and gains.

It's critical to maintain track of your earnings and capital gains from cryptocurrency trading.

"The IRS is looking for capital gains records," White explains. If you have any unreported crypto, you should review your previous tax returns and consider obtaining a crypto portfolio tracker to help you keep track of your transactions.

Diversify and protect your investments.

Finally, it's a good idea to take certain precautions to protect your crypto holdings from market fluctuations and potential security risks.

DeCicco advises diversifying your holdings (just as you would with traditional assets) to mitigate the impact of any new regulations on individual cryptocurrencies or tokens. "Diversification is vital, whether or not regulations are implemented," she argues.

Conclusion

Investing in cryptocurrencies carries a high level of risk, and you must be ready for anything. Inexperienced investors should only invest what they can afford to lose without major repercussions.