Is Crypto Without Risk Possible? (The MYTH of Risk-Free Investing)

The idea of crypto without risk is a myth. 

As is the case with all forms of investing, there is no way to invest in cryptocurrencies without shouldering at least some risk. 

Fortunately, there are ways to mitigate how risky your investments actually are.

Will There Ever Be Crypto Without Risk?

There will never be a way to invest in crypto without some risk of your holdings diminishing in value. However, this is also true for investing in all other assets and commodities.

The concept of ‘risk and return’ is innate to the act of investing.

When investing in something, the investor is being asked to shoulder at least some risk. The goal is simply for the amount of risk that the investor accepts to be justified by the rewards they can receive.

There will always be factors impacting the crypto market that are simply outside of your control.

What you can do, however, is mitigate these risks and only place investments that fall within your risk tolerance. To do so, it is important to understand the different factors that can make an investment ‘risky’. 

What Are the Risks of Investing in Crypto?

To better understand why crypto investments always come with at least some risk, let's take a look at the different factors that can be at play when you make an investment.

Price Volatility 

Assets are only as valuable as we, collectively, determine them to be. Sometimes, investors can feel that an existing asset is not valued high enough and may overcorrect. Alternatively, they might think that something is valued too high and cause its value to sharply drop as a result. 

The frequent correction of an asset’s perceived value creates price volatility. 

This volatility is what gives you the opportunity to earn profit by buying crypto at a cheap entry price and selling at a high. At the same time, however, it can also mean losing money by buying and selling at the ‘wrong’ times—especially since markets are not always rational.

Smart Contract Risks

Smart contracts are a powerful way of enabling parties to exchange services and value without any central authority being involved. However, not all smart contracts are created equally. 

As pieces of software, smart contracts are only as legitimate as their code. Poorly-coded smart contracts can place you at risk, due to bugs and by not being airtight when it comes to their conditions. These contracts could even fail to screen for points of failure such as participants holding admin keys. 

Further, some smart contracts may be coded maliciously to include exploitable backdoors—which is why it is so important that they have transparent code.

Jurisdictional Risk

Another risk that an investor can take when investing in crypto and other assets is jurisdictional risk. 

It is always important to be aware of your local laws when investing, as regulation is not standardized across the world. 

While the overwhelming majority of countries have not attempted to make it illegal to invest in crypto, there are taxation rules that will apply to you when you sell your holdings in most jurisdictions.

Theft

A major risk for crypto holders is the threat of having their coins stolen. By now, you have likely seen countless headlines about the amount of crypto that gets stolen each year. According to CoinDesk, crypto theft rose to $20.6 billion USD in 2022.

The good news, however, is that theft still represents a small share of the crypto market—at under 1%. Further, most of this theft is actually avoidable; it occurs due to people using centralized exchanges, taking part in sketchy DeFi protocols, and otherwise failing to store their funds safely.

Malicious Actors and Scams

As in most industries, the crypto market is no stranger to bad actors who set out to exploit its popularity. For instance, the industry has seen its fair share of rug pulls and ponzi schemes.

It is very important to be mindful of the fact that not all crypto projects are created equal. Centralized projects, in particular, can sometimes be designed to exploit their users.

This is what makes it so important to separate the platforms that are truly decentralized from the exploitive projects that merely claim to be.

User Error

Far and away, many of the biggest risks associated with crypto boil down to user error. Billions of dollars worth of crypto has been lost as a consequence of avoidable mistakes.

When it comes to decentralized technology, there is no way to reach out to ‘customer service’ when something goes wrong. 

Holding decentralized coins means being your own bank—and shouldering the risks that come with it. 

At the same time, this means that the largest controllable risks when it comes to crypto can be mitigated by consuming educational content and engaging in safe practices when investing in cryptocurrencies.

How to Mitigate Risk in Crypto

There are actually many things that you can do to mitigate your risk when investing in crypto.

The first is to always do your own research. Promoters, holders, and outlets often have their own agendas when it comes to promoting certain activities within the crypto space. As a result, the best way to avoid unnecessary risk is to build your own understanding of crypto and compare multiple resources.

The next thing to do is to make sure that you are engaging with a truly decentralized blockchain. While crypto uses blockchain technology across the market, not all coins are actually decentralized. But there is a key set of principles that you can use to help evaluate which projects stay true to crypto’s mission.

When investing in crypto, it is important to store your own coins using safe security practices. In the crypto community, the phrase “not your keys, not your coins” is often used to emphasize why self-custody is so important. When you use a centralized exchange, the exchange has control of your private key. Which means they can fail to safeguard your crypto or even steal your funds.

Another key way to mitigate risk with crypto is to only engage with reputable smart contracts that provide their source code. This transparency allows smart contracts to be audited to ensure that they do not contain incompetent or malicious code.

The same goes for decentralized applications (dApps). There are many fantastic dApps out there today, but the crypto market is also rife with bad actors. To mitigate your risk, it is safest to only get involved with dApps that are reputable, transparent, truly decentralized, and free from governance and admin keys. 

Finally, the most important rule of all, is to never invest more than you are willing to lose.

While there is no such thing as crypto without risk, following these guidelines and furthering your crypto knowledge will allow you to get involved with crypto more safely.