Economic risk is referred to as the risk exposure of an investment made in a local or foreign country due to changes in the business conditions or adverse effects of macroeconomic factors. The economic risks may include exchange rate fluctuations, a shift in government policy or regulations, political instability, or the introduction of economic sanctions.
Furthermore, economic risk is the risk faced by a business organization or a company that has a foreign branch or investment in a foreign country due to factors such as a change in government policies, change in government, a reduction in the credit rating of foreign investment, or significant movements in the exchange rates affecting.
Although there are several risks, such as volatility, cybertheft, and hack, decentralization, Peer to Peer transactions, loss of private keys, unregulated investment platform, regional regulation, currency conversion, and taxation risks, that encounter cryptocurrency investors, however, in this article we explore on economic risk, particularly economic risks are also among critical risks that arose from the lack of regulation in the cryptocurrency market.
Some countries, such as China, have banned cryptocurrency trading multiple times. The move which uncovered economic risk, particularly, an outright ban on cryptocurrency mining was a massive economic loss to the industry of these countries. Mining considered to be an international industry, and large capital outlay goes towards the land, energy, and infrastructure needed to set up mining warehouses.
The mining ban, for instance, in China, drove miners to sell or ship their equipment overseas and invest capital in countries that considered friendly, such the United States. One consequence was strengthening the network, as mining operations were diversified. As such, future bans may create an effect on the market.
Most cryptocurrency mining occurs in the United States, Kazakhstan, Russia, Canada, Malaysia, and Iran. Unfortunately, some networks face great challenges. In Kazakhstan, for instance, power has been rationed away from miners to conserve energy during electricity shortages, forcing miners to leave the country. The process was estimated to cost Kazakhstan’s economy 1.5 billion USD over the five years.
Economic Risk
The economic risks of investing in cryptocurrencies are mainly related to its volatility, which may cause loss of assets. Cryptocurrencies are risky and speculative, and it is important that investors understand the risks before they start investing. Cryptocurrency markets are volatile: unexpected changes in market sentiment can lead to sharp and sudden changes in price, resulting in huge economic losses.
However, cryptocurrencies have created advantages for economic growth, by for instance improving the way businesses do their daily work. For instance, blockchain has improved financial institutions’ cross-border transactions. Also, messaging apps have used the technology in favour of deals with private investors. Car leasing and sales can use blockchain to streamline car leasing.
Investment Risk
Cryptocurrency markets are highly volatile, loosely regulated, and without strong protections against abuse and manipulation and therefore pose significant investment risks that are related to the economy. Over the last few years, institutional investors, such as hedge funds, have entered the cryptocurrency investment market, seeing opportunities for long-term growth, hedging against traditional investments, and portfolio diversification.
Institutional investors also participate in semi-public funding of companies through so-called initial coin offerings, although such activities typically resemble venture capital funding and involve similar kinds of known risks.
Institutional investors, however, are more risk-tolerant than retail and regular investors, who have entered the market in significant numbers, especially since the market bubble at the end of 2017. It has been widely reported that many retail investors were unable to sustain their investment losses in this most recent market downturn, with losses, in some cases, of 75 percent.
Environmental impact
While many of the risks of cryptocurrencies and blockchains are endemic to financial and computing technologies in general, the environmental impact of most cryptocurrency and blockchain technologies is catastrophic. Accurate measurements of the environmental impact of existing cryptocurrency and blockchain technologies are politically fraught and widely incommensurate, but it is an uncontroversial fact that the impact is significant from energy usage.
The environmental impact of cryptocurrencies and blockchains is due to the electricity requirements of the mining or validating processes for the Proof of Work consensus algorithm. The Proof of Work consensus algorithm requires arbitrary computation by many computing devices, which are typically specialized and highly optimized for the task and located in industrial-scale facilities.
The amount of arbitrary computation required for Proof of Work consensus is variable and kept in check by rational responses to the mining profit margin. That is, when technology becomes more efficient, electricity prices are lowered, or the value of the cryptocurrency increases, capital investment in mining and, therefore, energy requirements increase. The same, however, is also true in reverse, in theory leading to lower energy use. There are green alternatives to the Proof of Work consensus algorithm, but they are still unproven and not widely implemented.
SECURITY RISKS OF CRYPTOCURRENCY INVESTMENT
As cryptocurrency markets are entirely operating digitally, it is highly vulnerable to security risk. Also, because cryptocurrency is not strictly controlled by any central authority, there is no way to recover it if a private key is stolen, for instance. Cryptocurrency investment is riskier than regular exchange investments since investors are the only ones responsible for keeping their private keys safe and out of the reach of hackers.
Risks to computer security
The track record for security in the cryptocurrency and blockchain ecosystem is exceedingly poor. While the major core protocols have a somewhat better track record, the many essential products and services associated with core protocols are frequently exploited. For example, more than half of all cryptocurrency exchanges have gone out of business in the last decade and, unfortunately, rarely return customer funds, usually due to internal or external theft.
Multi-million-dollar computer security hacks in wallet software or websites are also a monthly occurrence. The poor record of security is due to low quality and rushed software development, due to high demand for first-to-market products, and strong incentives for criminals to exploit vulnerabilities in cryptocurrencies. Cryptocurrencies make attractive targets for criminals because they are anonymous, transactions cannot be reversed, and the underlying assets are extremely valuable.
Risks For Privacy
Cryptocurrencies and blockchains are traditionally lauded as privacy-protecting technologies; however, in practice, privacy protections are both too strong and too weak. Privacy protections in most cryptocurrency and blockchain technologies are too strong because they impair legitimate and legal access to data. Strongly privacy-protecting technologies, such as Zcash, Monero, and Dash, are rogue technologies in that they are designed to shelter illegal activities under the guise of privacy.
However, the privacy protections in many cryptocurrency and blockchain technologies are also too weak, potentially exposing sensitive user data, and in most cases are not compliant with existing privacy regulations, such as the European Union’s General Data Protection Regulations (GDPR). These weak privacy protections are also at risk of systematic de-anonymization. For instance, bitcoin transactions have been successfully de-anonymized, to varying degrees, for several years.
Moreover, given the long lifecycle of hashing and encryption algorithms, future advances in de-anonymization will further expose sensitive data. Future advances in quantum cryptanalysis, for example, will significantly alter the efficacy of existing privacy and security protections.
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