JAKARTA - Interest in altcoins, or alternative digital coins, such as Dogecoin, in the world continues to soar this year. Among the investors standing at the forefront is billionaire Mark Cuban, who has built a portfolio of various digital coin and blockchain companies.
In April, Cuban revealed that he owns a cryptocurrency consisting of 60% bitcoin, 30% ether, and 10% other altcoins. For altcoin holdings including dogecoin and litecoin, he bought it with his 11-year-old son, Jake Cuban, earlier this year. It was revealed on Reddit's “Ask Me Anything” in February. Cuban also has DeFi, or decentralized finance, coins like sushi and aave.
Although Cuban has chosen to invest in altcoins, he has important advice for those considering doing the same. “It's like investing in anything else. Do your own research," Cuban, told CNBC. "Altcoins are no different from stocks, bonds, private companies."
As with any investment, don't blindly copy what people are doing. Keep in mind that investing in cryptocurrencies, and particularly in altcoins, can be much riskier than stocks or bonds. Cryptocurrencies are still considered a highly volatile speculative investment overall.
Recently, Cuban experienced the risk himself. On June 16, he stated that he was trading a DeFi token from Iron Finance called, titan, which eventually fell to zero in just one day.
At first, players in the crypto world, speculated that this was the result of a carpet tug, which is a type of scam where developers abandon projects and go with investors' funds. Iron Finance denied the claims. The project said in a blog post that the crash was caused by a "bank run," or panic sale, and token algorithmic code.
While it's rare for altcoins to actually “run out”, it serves as a good reminder of how dangerous investing in crypto can be, and why you should understand what you're getting into beforehand.
“Because the value doesn't really match some underlying source of value — like real estate, or profit or interest. There is almost no way to predict whether (cryptocurrency) will go up or down at any given moment. It's pure speculation," said James Ledbetter, editor of the FIN and CNBC fintech newsletters.
Experts agree with Cuban that it is very important to do thorough research before investing. Remember, only buy as much as you can bear the loss. If you are interested in altcoins, here are some types of risks that you should be aware of.
1. Reputational Risk
Reputational risk is the threat that an altcoin project may not be in good standing. Before investing, it is important to determine whether the founders of the project are credible people.
2. Market Access Risk
Market access risk refers to the accessibility of each digital coin, including where it is available for purchase.
If altcoins are only available through an obscure backchannel, it might be worth thinking about investing a little more. If the method of buying a coin seems vague, it may be an unsafe altcoin project or a scam.
3. Technical Risk
The technical risk is enormous, as the quality of the code behind each digital coin can vary. Many dog-themed altcoins, for example, are created by developers who copy and paste the source code of other coins to create their own.
Dogecoin, in particular, is a fork, or code copy, of luckycoin, which is a fork of litecoin, which is a fork of bitcoin. This can leave room for weakness in the code, making altcoins potentially less secure and vulnerable to malicious actors.
It is smart to ensure that a reputable third party has audited and reviewed the code of any altcoin you wish to purchase. The audit will reveal if there are problems in the development of the digital coin, including whether it is possible for a central party to control the network or its funds, which are potentially dangerous and cause volatility.
However, even if the coin is audited, obscure projects may still slip through the cracks. Experts advise: "You should only invest as much as you can afford to lose."
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