What Are the Operational Risks Behind Using Cryptocurrency?

There’s no doubt that cryptocurrency has become a significantly more mainstream marketplace in 2020, while tokens such as Bitcoin have showcased robust growth during the same period.

In fact, this asset broke the $20,000 for only the second time in its history earlier this month, reaching a new all-time high in the process. It is also blazing a trail for others to follow in the altcoin market, with tokens like Ethereum and Ripple having experienced a hike of 30% in the last month alone.

In this post, we’ll take a closer look at cryptocurrencies and their advantages, while appraising the operational risks behind using this blockchain-powered technology.

What is Cryptocurrency and What are its Benefits?

In simple terms, cryptocurrencies represent a new asset class that allows one user to transfer a coin or token to another utilising blockchain technology.

Such transactions are completely transparent and encrypted, as creating secure transactions that are recorded and accessible through blockchain’s distributed ledger.

As the market has grown since the inception of Bitcoin in 2009, there are now more than 1,300 cryptocurrencies currently available to users, which can be used to purchase a growing number of products or services and traded widely as a viable asset class.

Apart from being open and immutable, the crypto market is also increasingly diverse in its nature, with a number of altcoins available to traders in addition to Bitcoin. This has proved crucial to the success of the market, which achieved a total market capitalisation of $237.1 billion at the end of 2019.

For example, the value of Bitcoin and its finite nature has much in common with gold, creating a scenario where the former has emerged as a popular safe haven asset during 2020.

Conversely, Ethereum allows for smart contracts and interactions, adding a further layer of value in a volatile marketplace.

What are the Operational Risks Associated with Cryptocurrency?

Despite these benefits, the crypto market is still relatively immature and therefore delivers a number of regulatory risks to users across the globe.

One of the main operational risks associated with using cryptocurrency is the relative lack of regulation, which follows on from the decentralised nature of the marketplace and its individual assets.

This means that any changes in functionality requires a consensus amongst miners and users rather a new monetary authority policy, and while this offers some benefits it also makes it hard to agree new measures or enforce these marketwide.

According to RSM, there are also significant risks associated with operational security, not least the fact that immutable crypto transactions cannot be reversed in any given circumstances.

While this protects users against the risk of fraud or manipulation, it also means that you cannot reclaim coins or tokens once they’ve been transferred to another wallet (at least without consent of the user). 

On a more complex level, those of you who are running a crypto trading operation may experience an issue if an unscrupulous trader moves coins into their own personal wallet rather than a corporate alternative, as there is little that can be done to retrieve this capital.

Of course, these risks can be mitigated in part by guaranteeing your own security and balancing the currencies that you keep on an exchange, your local device, and in cold storage.