Why People Are Losing Their Investments in DeFi and Crypto
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Introduction
What we’ve been noticing
Decentralised finance (DeFi) and cryptocurrency or crypto have become increasingly popular in recent years, with billions of dollars being invested in these emerging technologies. The global decentralised finance market is expected to be worth USD 11.78 billion in 2021 and is forecast to grow at a compound annual growth rate (CAGR) of 42.5% from 2022 to 2030.
However, as with any new and rapidly evolving industry, there are a number of risks that investors should be aware of. Investing in DeFi and crypto is not without risks, but with proper research and risk management, it can be a viable investment opportunity. In this article, we will discuss some of the key risks associated with DeFi and crypto, and what investors can do to mitigate them.
Key Topics this Article will Cover:
What you need to know before investing in any DeFi or crypto project
Types of risks in DeFi and crypto
How to mitigate the risks associated with DeFi and crypto
Conclusion: Our verdict. Is it worth getting involved?
What you need to know before investing in any DeFi or crypto project
Investing in DeFi and crypto can be risky, as the markets are highly volatile and largely unregulated. Additionally, there have been cases of fraud and hacking in the past, which can result in the loss of funds. According to Chainalysis, a total of $1.4 billion has been lost to fraud and hacking in DeFi and crypto markets in 2022.
However, it is also important to note that many legitimate projects and companies exist in the DeFi and crypto space. This is because some investors have made significant returns on their investments.
It is wise to thoroughly research any project or company before investing, and to consult experts for financial advice. Diversifying your investment portfolio and only investing in what you can afford to lose is also a sound strategy. Additionally, it's important to keep in mind that the regulatory environment for DeFi and crypto is constantly evolving, and laws and regulations may change in the future. This means staying informed and being prepared for any changes that may affect your investment.
Types of risks in DeFi and crypto
There are several types of risks associated with DeFi and crypto. Listed below are some of the most common things you need to consider.
Regulatory risk: The regulatory environment for DeFi and crypto is constantly changing, and there is a risk that governments could impose stricter regulations that could negatively impact the industry.
Liquidity risk: Many DeFi protocols and crypto exchanges have low liquidity, which means that there may not be enough buyers or sellers to match trades. This can result in large price swings and make it difficult to exit a position.
Smart contract risk: Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. Smart contract bugs or errors can lead to unintended consequences and loss of funds.
Counterparty risk: In DeFi, you are often entrusting your assets to a third party, such as a decentralised exchange or lending platform. There is a risk that these entities could become insolvent or exit scams, resulting in the loss of your assets.
Market risk: The value of cryptocurrencies and DeFi assets can be highly volatile and can be affected by a variety of factors, including market sentiment, global economic conditions, and regulatory changes.
Cybersecurity risk: DeFi and crypto assets are stored digitally and are vulnerable to hacking and other forms of cybercrime.
Operational risk: Risks of errors in the operations of platforms, organisations, and projects that may lead to financial losses.
How to mitigate the risks associated with DeFi and crypto
The following are several steps that can be taken to mitigate the risks associated with DeFi and crypto:
Stay informed: Keep track of the regulatory environment and any changes that could impact the industry.
Diversify: Spread your investments across different DeFi protocols and crypto assets to minimise the impact of a single event.
Use reliable platforms: Only use reputable and well-established DeFi protocols and crypto exchanges.
Use a hardware wallet: Store your assets in a hardware wallet, which is a physical device that stores your private keys offline and greatly reduces the risk of hacking.
Understand the smart contract: Before investing in any DeFi protocol or using any smart contract, make sure you understand how it works and the potential risks involved.
Don't invest more than you can afford to lose: As with any investment, it's wise to remember that the value of DeFi assets and cryptocurrencies can be highly volatile and you should only invest what you can afford to lose.
Using a cold storage solution: cold storage is an offline storage solution you can use to store your assets.It's more secure than a hot wallet, it keeps your private keys offline and eliminates the risk of hacking.
Have a security plan: have a plan in case of any cybersecurity threat, such as two-factor authentication and strong passwords to secure your assets.
Conclusion: Our verdict. Is it worth getting involved?
Investing in DeFi and crypto is like buying a ticket for a roller coaster: it can be exciting and thrilling, but it’s important to check the safety features and buckle up before taking the ride.
Ultimately, DeFi and crypto have the potential to revolutionise investment, borrowing, and asset management. However, investors should be aware that this is a new and rapidly evolving industry, which entails a number of risks. With verified information, diversification, and reliable platforms, investors can mitigate these risks and invest in these emerging technologies with confidence. As with all other forms of investments, while it can be a thrilling and exciting ride to invest in DeFi and crypto, do always check the safety features and buckle up before riding.
Watch the video below to learn more about risks in DeFi and crypto. Don’t forget to like and subscribe so you don’t miss out on important updates and our newly uploaded videos.
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Lisa JY Tan | Founder and Managing Director
E: Lisa.T@EconomicsDesign.com | W: EconomicsDesign.com