There are few financial topics hotter than "cryptocurrency" right now, and even less with its loyal following.
But just like with any new investment opportunity, there are risks to getting involved. Let's take a look at what those are.
Risks of Crypto Lending and NFTs
Volatile Crypto Prices and an Illiquidable Asset
A primary concern when it comes to crypto lending and cryptocurrency, in general, is its market fluctuation. Because cryptos are highly susceptible to price volatilities, you could end up getting a lower return on investment. Take this example from CryptoGeeks.org:
"Assuming you lent 1 Bitcoin (BTC) when the price was $60,000. If the loan is held up to the point where Bitcoin dropped to $42,000, and then the loan is paid back as 1BTC, the value of what you gave out has fallen."
When it comes to NFTs, you can only sell once there is a buyer ready to purchase it, making them volatile when it comes to their liquidity as well.
Not Recognized by Federal Laws
In the U.S., NFTs are not recognized — therefore not protected — by federal laws. Money deposited into Member FDIC banks is insured up to at least $250,000 per depositor and guarantees you'll be refunded in case of bank bankruptcy or theft.
In crypto lending, deposits are not insured by this federal deposit insurance like they are with banks. So, you could lose all your money if a platform goes belly up. "When this happens, the crypto assets of lenders and savers automatically become part of the insolvency estate used by the platform provider, and you would be treated as a creditor in the insolvency proceedings."
Additionally, even if the platform files for bankruptcy, there wouldn't be enough liquidity for loan disbursements and interest payouts.
Fun fact: Flagship Bank is Member FDIC.
Cyber Attacks & Security Concerns
Unfortunately, cyber-attacks and security breaches are nothing new to cryptocurrencies, with crypto lending platforms being no different. Fortunately, cyber attacks on crypto lending platforms do not result in the loss of actual cryptos, just your private data — which I guess is still pretty unfortunate.
"At any given time, the risk of default, counterpart bankruptcy, and theft hangs in the balance for investors." To combat this, some take out private insurance policies to cover these risks, but not all assets managed are protected from technical risks and robbery. Others rest the sole custody and responsibility of their crypto lending assets within their own wallet, management, and knowledge of security protocols. In that case, third-party vendors do not hold your assets or offer insurance. So your improper management of asset security would be directly to blame for theft or account lockout.
It is also easy to be scammed into purchasing an illegitimate NFT. According to Naveen Joshi at Forbes, "When an individual invests in an NFT, they may be looking at a fake or a copy of an artwork from a seller disguised as the legitimate owner or an artist. In reality, the artwork could be from an unverified seller duping investors into paying for an NFT that they might not have rights to access or sell." Because transactions conducted on the blockchain are irreversible, you'd be out the money you spent on the bait NFT.
Smart Contract Technology Failures
Despite how they sound, smart contracts are not legally binding contracts. They are programs coded in a blockchain that automate the crypto lending processes. They regulate certain actions in the cryptocurrency world like interest payments and collateral liquidations.
Since these software codes are designed by developers, there could be security or functionality flaws that would hurt investors.
Unclear Cryptocurrency Lending Regulations
Cryptocurrency is an advanced technology with little to no primitive regulations, making it a risky game for investors. If your assets disappear, you cannot take legal action.
While the U.S. government is starting to play catch up on policy development — at least when it comes to NFTs — there is still a long way to go before they will be recognized as a commodity or service that needs prohibitions and rules.
VeeCon 2022 Recap
On the topic of cryptocurrency and risks of crypto lending, Minneapolis was the proud host of the internationally recognized and highly coveted event, VeeCon. U.S. Bank Stadium held the multi-day conference that brought in entertainers and entrepreneurs from across the globe including Snoop Dog, Eva Longoria, Deepak Chopra MD, Lisa Leslie, and of course, Gary Vee himself. This event is meant to serve as a platform for discussions and performances from emerging leaders in NFTs and Pop Culture and provide a space where the Web3 community can come together to share ideas and learn together. With seminars around relationship-building, NFTs across industries, and founder storytelling, it was one for the books.
Do you believe the risks of crypto lending and NFTs outweigh the rewards? Only time will tell. If you're looking for a more stable means of funding or passive income avenue, Flagship Bank has the options and resources to assist you on your journey towards financial freedom.