Risks

Lesson

Digital assets, such as cryptocurrencies and tokens, have unique characteristics and risks that investors should know before investing.

Practice Question #1

Which of the following is a risk unique to digital assets compared to traditional assets?

A) Market manipulation

B) Volatility

C) Cybersecurity risk

D) Regulatory risk

Select an option above to see an explanation here.

A) Market manipulation can occur in both traditional and digital asset markets. B) Volatility can be present in traditional and digital asset markets, although it may be more pronounced in digital assets. C) Cybersecurity risk is unique to digital assets, as they exist solely in a digital format and are susceptible to hacking and theft. D) Regulatory risk can affect both traditional and digital assets, although the regulatory landscape for digital assets may be less established.

Terms

Regulatory risk:: The risk that changes in regulations or enforcement actions could negatively impact an investment.
Cybersecurity risk:: The risk of unauthorized access, theft, or damage to digital assets due to vulnerabilities in technology or human error.
Market manipulation:: The act of artificially inflating or deflating the price of an asset to profit from the resulting price movement.
Fraud risk:: The risk of losing money due to dishonest or deceptive practices by individuals or entities involved in the investment.
Operational risk:: The risk of loss resulting from inadequate or failed internal processes, people, or systems.

Practice Question #2

What is a key difference between digital assets and physical assets?

A) Digital assets are more susceptible to market manipulation.

B) Digital assets have a longer history and more established regulatory framework.

C) Digital assets exist solely in a digital format and cannot be held in physical form.

D) Digital assets are less volatile than physical assets.

Select an option above to see an explanation here.

A) Both digital and physical assets can be susceptible to market manipulation. B) Physical assets have a longer history and more established regulatory framework. C) Digital assets exist solely in a digital format and cannot be held in physical form, unlike physical assets such as gold or real estate. D) Digital assets may be more volatile than physical assets, although volatility can vary depending on the specific asset.

Historical Example

In 2017, the price of Bitcoin experienced extreme volatility, rising from around $1,000 at the beginning of the year to nearly $20,000 by December before falling back to around $3,000 by the end of 2018. This rapid rise and fall in value highlighted the risks associated with investing in digital assets, particularly their price volatility and susceptibility to market manipulation.

Practice Question #3

Which of the following risks is associated with investing in digital assets due to their reliance on technology?

A) Operational risk

B) Liquidity risk

C) Cybersecurity risk

D) Regulatory risk

Select an option above to see an explanation here.

A) Operational risk can affect traditional and digital assets, although it may manifest differently. B) Liquidity risk can affect both traditional and digital assets, although it may be more pronounced in digital assets due to their relatively smaller market size. C) Cybersecurity risk is associated with investing in digital assets due to their reliance on technology and vulnerability to hacking and theft. D) Regulatory risk can affect both traditional and digital assets, although the regulatory landscape for digital assets may be less established.

Real-World Example

In 2019, a major cryptocurrency exchange was hacked, stealing over $40 million worth of digital assets. This incident underscored the cybersecurity risks associated with investing in digital assets and the importance of taking appropriate precautions to protect one's investments.