It’s easy to see why someone would be interested in investing in crypto. Some of them have a long history of providing excellent returns. Other cryptocurrencies, on the other hand, are tackling real-world issues in creative ways.
However, the cryptocurrency market may be somewhat dangerous. Here are two of the most serious risks I see threatening your potential for favorable outcomes.
Risk 1: Terrible tokenomics
When demand for a currency or token outstrips the supply, it indicates that its value is increasing. When cryptocurrencies are designed, their developers attempt to stimulate interest and control production. “Tokenomics” is the term used to describe this process, which varies depending on the project. Some of the designs are quite effective. However, in several scenarios, the tokenomics do not encourage long-term price appreciation.
As an example, I think STEPN (GMT) did not create its Green Satoshi Token (GST) to increase in value sustainably. GST is earned by using the app for exercise and is used in the app to level up and play. When GST is utilized – taken out of circulation – it is burned. There’s no limit on the amount of GST, though. The more people use and play the program, the more GST may be generated.
It’s not ideal to have an infinite supply of coins. However, it is more than that. You may trade GST for USD Coin and trade USD Coin for any other crypto. The only people enticed to purchase GST tokens would be individuals attempting to rise quicker in the STEPN app.
The irony is that individuals who join the STEPN network allegedly enhance GST values for a short time. GST, on the other hand, is produced faster as a result of this influx of new users, lowering long-term value.
STEPN seems like a fun fitness app, and it certainly should be enjoyed. However, I am doubtful that it is a lucrative long-term business opportunity.
This is not the case for all bad investments. However, investors should be aware of what’s driving token demand and what is limiting its supply. To summarize, studying tokenomic principles may help you avoid poorly structured systems.
Risk 2: FOMO
The most dangerous risk for crypto investors is FOMO (the fear of missing out). Cryptocurrencies like Bitcoin and Ethereum, despite recent dips, have far outperformed most equities in terms of performance. And the promise of extremely high returns like these might cause investors to invest in crypto before they are ready or before they’ve fully understood what they are investing in.
FOMO is an emotional reaction to a bullish thesis. We believe it will rise quickly. As a result, one of the most effective ways to resist FOMO is to spend time creating a bearish thesis – which is an explanation of what might go wrong.
Take Ethereum for example. In the world of decentralized applications and smart contracts, I believe the Ethereum blockchain has a lot of potential. With Ether prices at their lowest level since early 2020, it would be simple to get FOMO with Ether right now, anticipating a quick recovery.
However, with Ethereum, there is a lot of danger right now. This blockchain is moving from a proof-of-work chain to a proof-of-stake network. Let’s say it Simply put, the tokenomics are changing. Nodes will stake Ether to execute transactions, instead of mining it by using many computers to solve math problems that are complex. Holders will join staking pools to earn yield and participate, as Ether is being locked up for lengthy periods of time. The shift to proof-of-stake completely transforms the Ethereum playing field, making it difficult to predict what the long-term consequences might be.
Simply asking what could go wrong is an effective deterrent to FOMO.
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