Social media was aflame with euphoria and glee on December 5 as Bitcoin crossed $100,000 for the very first time, buoyed by investors’ hopes in a pro-crypto Trump administration. As Bitcoin’s value spiked, other cryptocurrencies and tokens followed suit. During that week, Ripple’s XRP surged by almost 50%, TRON’s TRX shot up by more than 60%, and Hedera’s HBAR rose by a formidable 90%. Meme coins and tokens were also riding high as Elon Musk’s DOGE - Department of Government Efficiency - as well as the ticker for the Dogecoin currency, entered the common lingo.

Several investors are now wondering whether to enter the buzzing crypto economy, while others are making their first crypto trades to capitalise on the spurt in price. Such a market environment is also filled with dangers.

Here are some potential pitfalls and risk factors that every crypto investor should be aware of.

Scams

There are countless ways to dupe aspiring crypto investors who want to make a quick buck without bothering to learn about the market.

Malicious actors often try to lure in buyers with meme coins that are based on popular cultural references. These tokens can enjoy skyrocketing prices in a matter of hours or days, luring others to buy huge volumes of the token. Soon enough, many investors will realise that their tokens cannot be sold or returned as the makers of those cryptocurrencies will abscond, leaving no trace of their digital footprint.

Alternatively, the tokens can be sold normally, but the creators may hold large amounts of the currency themselves; when the prices are high enough, they quickly sell their assets and cash out. This causes the overall market cap of the token to crash, leaving other investors with nearly worthless assets.

Hacks

While crypto hacks remain an ever-present risk all-year round, hackers and scammers are especially incentivised to try and dupe customers when crypto prices rise high. With Bitcoin crossing $100k, hackers know that there will be a large pool of new and curious traders who are looking to invest their money.

More advanced hackers, including those backed by enemy state regimes, may attack users’ wallets or even the wallets maintained by crypto exchanges.

On the other end of the spectrum, even amateur hackers may successfully target victims through the use of romantic manipulation (known as pig-butchering scams) on dating apps, fake “airdrops” online, offers of technical help/advice on social media, or phishing emails that contain malware.

Many AI chatbots have also simplified the process of generating malicious code or fake messages that can be used to fool crypto investors into giving up their credentials.

Failed currencies

Even cryptocurrencies/tokens that were started by trusted teams of technologists and expert traders can fail without reason, wiping off millions or even billions of dollars in value. Now consider that not all cryptocurrencies are helmed by professionals. Crypto tokens on major blockchains can be created by almost anyone, including those who create such assets as a joke or to benefit themselves alone.

While non-malicious actors such as influencers or celebrities might promote crypto tokens or take part in ads featuring them, be aware that the person’s fame does not necessarily guarantee the success of the cryptocurrency or the token.

A case in point is Haliey Welch’s meme-token HAWK, which references an explicit catchphrase popularised by the internet personality this year. Despite her viral fame, the influencer’s token crashed soon after its launch, with several investors planning to take legal action against her.

There are also multiple crypto tokens inspired by the viral Thai pygmy hippo Moo Deng; many of these have more or less completely crashed shortly after being launched, according to the blockchain statistics on CoinMarketCap.

A screenshot of a Moo Deng-inspired cryptocurrency that has lost most of its value | Photo Credit: CoinMarketCap

For this reason, crypto investors must invest time in researching the assets they wish to obtain or trade, and study the relevant metrics to assess their health.

FOMO (Fear Of Missing Out)

With Bitcoin hitting $100k, a number of investors are likely to be bitten by the FOMO (fear of missing out) bug.

This means that in an effort to ride the wave of market euphoria while prices last, amateur traders are likely to make sudden or reckless trading decisions they would not have done so otherwise. These investors may buy more than they originally planned, hoping that prices will rise.

This is a risky strategy as it could result in inexperienced investors diving into the market without being equipped with the information they need. Others might end up buying/selling crypto on the basis of their emotions, trending headlines, or peer pressure. Some may go far beyond their means and invest such huge sums of money that they can no longer support their or their family’s daily expenses.

More experienced traders would be able to invest their funds efficiently and carry out both short-term and long-term crypto trades with the help of a carefully calculated plan that aligns with their goals and financial position.

Lack of knowledge

As crypto adoption grows, many new investors who enter the market may be ignorant of essential facts such as the blockchain technology underpinning crypto, India’s crypto tax regulations, and the legal status of existing crypto exchanges and lending platforms. This puts them in both financial and legal danger.

Furthermore, many traders do not carry out their own research before buying assets, but uncritically follow self-styled analysts, finance influencers, or content creators who may be receiving payments to promote highly unstable or even scam-based cryptocurrencies.

New investors may also choose the services of a particular crypto exchange simply because it is popular and based in their own country, instead of choosing an institution that is right for their needs.

Many crypto investors also lack basic market skills such as reading candlestick charts, using trading indicators to understand currency movements, analysing and estimating possible price movements, identifying potential scam coins, setting up automatic orders, etc. that are used to maximise profits and reduce losses.

Non-technical traders who are new to crypto may also not understand fundamental categories, such as the difference between a coin and a token, the difference between Ether and Ethereum, the difference between Bitcoin and a meme-coin, etc. Others who wrongly believe that crypto investments can be equated to traditional financial instruments - such as fixed deposits - invest their life savings or family members’ pension funds without realising just how quickly these assets can be lost or frozen by their largely unregulated custodians.