Is Investing in Cryptocurrency Safe and Legal?

Is Cryptocurrency a Safe Investment?

Cryptocurrency is known for its extreme volatility and high-risk nature. Many investors have suffered significant losses due to scams, hacking incidents, programming bugs, and market fluctuations. While cryptography and blockchain technology are generally secure, the technical complexities of using and storing cryptocurrency pose substantial risks for new users. 

Risks of Investing in Cryptocurrency 

User Risk: Cryptocurrency transactions are irreversible. Many users have lost their assets due to forgotten passwords or sending crypto to incorrect addresses. It is estimated that about one-fifth of all Bitcoin is now inaccessible. 

Regulatory Risk: The regulatory status of cryptocurrency remains uncertain in many countries. Some governments aim to regulate it as a security or currency. Sudden regulatory crackdowns can make it difficult to sell cryptocurrency or cause a sharp decline in market value. 

Counterparty Risk: Many investors rely on exchanges or third-party services to store their cryptocurrency. If these platforms are hacked or go bankrupt, investors risk losing their assets. 

Management Risk: Cryptocurrency projects often lack robust safeguards against fraudulent or unethical behavior from management teams. Many investors have lost funds due to mismanagement or scams. 

Programming Risk: Many cryptocurrency platforms use automated smart contracts. If these contracts contain bugs or vulnerabilities, investors may lose their assets. 

Market Manipulation: Large entities or influential individuals can manipulate the cryptocurrency market, which can be detrimental to smaller investors.

Advantages and Disadvantages of Cryptocurrency

Advantages

Cryptocurrency is a new and decentralized concept of money that allows for direct transactions without relying on conventional banks or financial institutions. It does not require any intermediaries to transact between two parties. As a result, it creates an independent and secure transaction system.

1. No need for intermediaries

Traditional banking systems require banks or financial institutions to transact. However, direct transactions are possible in the cryptocurrency system, which reduces time and costs.

2. Reduced risk of single failure

Since cryptocurrency works based on decentralized technology, it is not controlled by a specific institution or government. As a result, the risk of a global financial crisis if a bank or large financial institution fails is reduced.

3. Fast transactions can be completed

Transactions can be made faster through cryptocurrency than through regular money transfers. For example, a special type of loan called "flash loan" can be approved and repaid in a few seconds, which is not possible in the conventional banking system.

4. Remittances are easier

Cryptocurrencies can be used to send money to different countries. Traditional methods of sending money require high fees, but with cryptocurrencies, this cost is much reduced and transfers can be made faster.

Disadvantages

Although cryptocurrencies have many advantages, they face some challenges and risks.

1. Not completely anonymous

Cryptocurrency transactions are done through pseudonyms, but they are not completely anonymous. Each transaction is recorded on the blockchain, which can be tracked by relevant agencies (such as the FBI). As a result, it does not provide complete privacy.

2. Used in criminal activities

Cryptocurrencies are used for various illegal activities, such as money laundering, drug trafficking through the dark web, and ransomware attacks. As a result, it has become a popular medium for criminals.

3. Ownership is becoming centralized

Although the concept of cryptocurrency is decentralized, in reality, it is becoming controlled by a few large investors and organizations. Institutions and investment fund managers are acquiring its main ownership, which is forcing it to deviate from its original purpose.

4. High mining costs and energy consumption

The process of creating (mining) cryptocurrency consumes a lot of electricity. Mining a popular cryptocurrency like Bitcoin requires so much energy that it can be equal to the total electricity consumption of many countries. As a result, it has a negative impact on the environment.

5. Security risks

Although blockchain technology is extremely secure, exchanges and digital wallets are still subject to hacking. Several crypto exchanges have been hacked, resulting in millions of dollars in losses for investors.

6. Price volatility

The price of cryptocurrencies is very volatile. For example, in November 2021, the price of Bitcoin reached $65,000, but within a year and a half, it fell to $20,000. Because of such volatility, many consider it a "bubble investment".

Is Cryptocurrency Legal? 

The legality of cryptocurrency is a widely debated topic worldwide. Fiat currencies, such as the US dollar or the euro, are issued by governments or financial authorities and are recognized as legal tender. For example, the US dollar is officially recognized by the US government and is used as “legal tender.” However, cryptocurrencies are not issued by any government or private institution. Instead, they function as decentralized digital currencies powered by blockchain technology. Due to this unique characteristic, determining the legal status of cryptocurrency is quite complex. 

Cryptocurrency's Status in the United States 

In the United States, the legal status of cryptocurrency affects its usage and trading. In June 2019, the Financial Action Task Force (FATF) recommended that cryptocurrency transfers comply with anti-money laundering (AML) regulations. This means that user identities and transaction details must be collected during crypto transactions. 

The Internal Revenue Service (IRS) classifies cryptocurrency as property and imposes taxes on it. If you make a profit by selling cryptocurrency, you are required to pay taxes on those gains. The tax rate depends on how long you have held the cryptocurrency and how it was used. 

In July 2023, a landmark ruling was issued by a US court. The court stated that cryptocurrency should be considered a security for institutional buyers but not for retail investors. This ruling was seen as a significant victory for the crypto community. However, cryptocurrency exchanges remain regulated by the Securities and Exchange Commission (SEC), especially when crypto assets are offered or sold to institutional investors. 

As of June 2024, El Salvador is the only country that has officially recognized Bitcoin as legal tender. The regulation of cryptocurrency varies significantly in other countries. 

Cryptocurrency's Status in Asia 

Japan: Japan has recognized cryptocurrency as legal property. According to the Payment Services Act, cryptocurrency exchanges are required to collect customer information and comply with AML regulations. 

India: India is reportedly working on a regulatory framework for cryptocurrency, though it has not yet been enacted into law. While crypto exchanges can offer services, clear regulations are still lacking. 

China: China has imposed bans on cryptocurrency exchanges, trading, and mining. However, the country has introduced a central bank digital currency (CBDC) as part of its digital economy strategy. 

Cryptocurrency's Status in Europe 

Cryptocurrency is legal within the European Union. In June 2023, the Markets in Crypto-Assets (MiCA) regulation came into effect. This law establishes security and regulatory frameworks for cryptocurrency-related services. Under MiCA, financial service providers dealing in cryptocurrency must comply with AML and Know Your Customer (KYC) regulations. 

Conclusion:

The legality and use of cryptocurrencies are subjects of debate around the world. While some countries have legalized them, many have imposed strict restrictions or banned them altogether. It is a high-risk investment for investors, as market volatility, security risks, and changes in regulations can affect their investments. However, interest in cryptocurrencies is growing steadily due to technological innovations and the benefits of decentralized transactions. Only time will tell whether its legality and use will become clearer in the future.