The risks of different cryptoasset products

Remember, not all cryptoassets are alike. Before investing, you should ensure you understand the specific risks involved.

1. Stablecoins

   • Stablecoins are designed to have a value that is pegged to an underlying asset which can be a fiat currency, commodity, or other digital assets. However, stablecoins are not without risk. The stability of a stablecoin is dependent on the value and stability of the underlying asset and the transparency and auditability of the stablecoin’s issuer, among other risks which may be unique to individual stablecoins. Depegging events may occur with stablecoins that fail to maintain adequate controls and risk mitigants. A depegging event is when the value of the stablecoin no longer matches the value of the underlying asset. This could result in a loss of some or all of your investment.

   • In addition there is also Algorithm Risk with respect to Staking: When an asset depends on an algorithm to stay stable (for example, by adjusting its quantity based on how much people want it), there's a risk. The algorithm could fail or act in ways the issuer doesn't expect. If that happens, the asset could become unstable and might lose its entire value.

2. Staking

   • Staking is essential for the proof of stake (PoS) consensus mechanism. It allows node operators to pledge tokens to a network as a guarantee for correctly performing block validation operations. These node operators receive newly minted tokens as rewards for adding valid blocks to the network. However, node operators who perform invalid functions will lose a portion (or all) of their pledged tokens–this is referred to as a “slashing penalty.”

   • There are risks involved with staking, such as: A liquidity risk - users may not have access to their staked tokens. So users with staked assets cannot sell or withdraw their assets.

   • Smart contract risk - there is a risk of a bug within the network, especially in respect of ETH as ETH staking/unstaking is still under development.

   • Slashing risk - there is a risk that a validator could lose a portion or all of its pledged tokens. More information is available at here here.

   • APY risk - APYs are indicative and not guaranteed and may vary over time. Past performance is not a reliable indicator of future results. The rewards rate is based on the estimated protocol rate, which is subject to change.

3. Meme Coins

   • Meme Coins (e.g. PEPE, DOGE) are crypto-assets whose value is driven primarily by community interest and online trends. There are risks associated with Meme Coins including:

   • Volatility risk - Meme coins, like all crypto-assets, can have extreme price volatility, often experiencing rapid and unpredictable price fluctuations in a short period of time. The value of meme coins can be influenced by a number of factors including social media trends, endorsements, and other factors that are unrelated to traditional investment fundamentals.

   • Market manipulation: Meme coins can be susceptible to increased risk of market manipulation. As a result the price can be artificially inflated followed by a sudden crash.

   • Lack of utility: Meme coins often lack intrinsic value or utility. They are primarily driven by community interest, online trends, and speculative trading.

   • Lack of transparency: Meme coins may have limited available information about their objectives and financials. This lack of transparency can make it challenging to assess the credibility and potential of a meme coin accurately.

   • Emotional investing: Meme coins often drive strong emotional reactions from investors, leading to impulsive decisions. Emotional trading activity can amplify losses.

4. Wrapped Crypto-assets / Wrapped Tokens

   • Wrapped tokens are tokenized representations of other crypto-assets. They are typically created to facilitate compatibility and interaction across different blockchain protocols. There are risks associated with Wrapped tokens, including:

   • Smart contract risk - Wrapped tokens rely on smart contracts to ensure their value remains pegged to the underlying asset. These contracts may have vulnerabilities or flaws that can be exploited, potentially leading to a loss of funds.

   • Collateral risk - The value of a wrapped token is typically backed by an equivalent amount of the underlying asset. If the mechanisms ensuring this collateralization fail, the wrapped token's value might not be preserved.

   • Custodial risk - The underlying assets for wrapped tokens may be held in custody by a third party. If this party becomes insolvent, has financial issues, mismanages the assets, or is subjected to fraud, cybersecurity incidents / hacking, the value of the wrapped token might be jeopardized.

   • Bridging risk - Wrapped tokens are often used to bridge assets between different blockchain ecosystems. The integration layers that facilitate these bridges might suffer from technical issues, bugs, therefore hampering the ability to transfer or use the tokens.

   • Pricing disparity - The price of the wrapped asset and its underlying asset might diverge significantly due to market inefficiencies or liquidity issues.