Why People Are Losing Their Investments in DeFi and Crypto
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.
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What else did you miss?
How to mitigate the risks associated with DeFi and crypto
Conclusion: Our verdict. Is it worth getting involved?
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Lisa JY Tan | Founder and Managing Director
E: Lisa.T@EconomicsDesign.com | W: EconomicsDesign.com