The Risks Faced by Cryptocurrency Investors in 2020

Last Updated on: 22nd November 2023, 05:28 pm

Every industry is being impacted by the coronavirus outbreak in some way right now. Reports from the Bank of England state that Britain is facing its biggest economic downturn in 300 years, so it’s clear that there is a far-reaching financial fallout taking place.

One area that is also being hit is cryptocurrency. According to researchers based at the University of Oxford’s Faculty of Law, the crypto markets did a U-turn. Initially there was a period of growth. Overall trading volume and spot market prices increased in the weeks leading up to large portions of the world going into lockdown. However, after 11 March things changed rapidly, with the markets seeing a decline.

The researchers gave a possible explanation for this. First, it could be that people saw this digital currency as a reliable place to invest. Then, just as it appeared there was a fall in the number of new cases of the virus, they decided to shift their finances to more conventional investments.

As the crypto market begins to redress the balance and make up for lost time, there are further risks associated with this digital asset to be aware of.

What are the risks?

There are several risks that are associated with cryptocurrency. In order to know how to navigate this technologically advanced virtual currency, it’s worth having an understanding of what these are and how to tackle them.

  • Getting regulatory approval

The EU implemented the Fifth Money Laundering Directive in July 2018. This was introduced to help introduce some rules and regulations to the crypto market in order to prevent crimes, specifically money laundering and the funding of terrorism.

To fit within the regulations, crypto businesses must think beyond meeting the requirements to operate and instead take a measured, thorough approach to countering the potential for crime. Businesses that offer a wallet provider service or a crypto exchange should carry out a risk assessment and follow regulatory guidance, such as that set out by the UK’s Joint Money Laundering Steering Group.

  • Understand your market

As with any financial market, understanding who is investing in cryptocurrencies can go a long way towards seeing a boost in numbers. If businesses don’t pick up on this, they could lose investors.

One way to do this is to tap into mobile device use. Millions of people use products such as Apple Pay and PayPal to buy products. This use of digital payment methods has opened the door for virtual currency.

In fact, Apple has already stated that it’s interested in cryptocurrency, having launched its CryptoKit, which lets users buy with bitcoin and other cryptocurrencies via their iPhone. If crypto businesses can go mobile, they can become an everyday form of finance.

  • Managing IT security

Everything digital has the potential to be hacked. When people are investing in a digital currency, therefore, it stands to reason that there is a need to have robust IT security measures in place. Blockchain provides a huge level of security, but there are still ways in for clever hackers. To manage this effectively, there must be a risk management framework that is introduced and consistently updated.

What would happen if the system were hacked? Is there a backup plan? Having the best team of experts available to set up the firewalls and create a recovery system should the worst happen is essential here.

  • Paying for tax

In the UK, one of the biggest risks is when it comes to paying tax. There are certain circumstances when it comes to whether Capital Gains Tax must be paid upon the sale of crypto assets, such as bitcoin. Those who invest and then go on to sell will need to work out if they need to pay, along with working out what can be classed as an ‘allowable cost’.

There are legal implications for those who don’t pay their taxes and declaring tax on cryptocurrency assets can be complex. To successfully manage this issue, it’s worth seeking specialist legal advice in order to account for the sale of virtual currency.

What next for cryptocurrency?

As long as crypto businesses understand the risks involved and how to tackle them and investors understand the tax implications, the future is bright for cryptocurrency. With huge names like Apple showing an interest, the world of virtual currencies is set to become even bigger.

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