Cryptoassets Risk Overview

Cryptoassets vary in their characteristics and risks. Before buying, ensure you understand the specific risks. Please also review Important Disclosures, and other applicable terms, conditions and agreements, available on our website. Please note that not all cryptoassets, stablecoins and Uphold products and services are available in all jurisdictions.

This Cryptoassets Risk Overview is provided for informational purposes only and supplements (and does not replace) the User Agreement, and any cryptoasset-specific risk statements made available to you. To the extent any statement in this Cryptoassets Risk Overview conflicts with the User Agreement or with applicable law, the User Agreement and applicable law control.

General risks common to all cryptoassets

What are the risks associated with cryptoassets generally?

• Volatility and Liquidity Risks: Cryptoassets are known for their high volatility which refers to rapid and significant price fluctuations that may be experienced over short periods of time. Cryptoasset markets are often driven by speculation and sentiment leading to rapid price movements based on market perceptions, positive or negative, based on news and rumors. It is essential to consider your individual risk tolerance and investment goals before engaging with cryptoassets. During periods of high volatility, you may be unable to buy or sell any cryptoassets.
• Nascent Technology: Blockchain technology remains in its early stages and the underlying technology continues to evolve. Technical issues, security breaches, and vulnerabilities of the underlying protocol can trigger price fluctuations. It is unclear whether the economic value or functional elements of cryptoassets will persist over time. Additionally, the cryptoasset ecosystem is rapidly developing in a competitive market, demand for any cryptoasset may decrease with the entrance of a competitor or simply the inability to establish long-term value.
• Hacks: Exploitable vulnerabilities are often discovered in the source code of cryptoassets, resulting in various issues such as impaired functionality, compromised user information, and theft of cryptoassets. Additionally, the cryptographic foundations of any cryptoasset may prove to be flawed or inadequate over time.
• Concentration Risks: Depending on the consensus mechanism used by a particular blockchain, if an individual or entity acquires control of more than 51% of the computing power (hash rate) used by the network, that party may be able to exploit this majority control to double-spend their cryptoassets. If successful, this could severely undermine confidence in public blockchain networks such as Bitcoin or Ethereum or any impacted blockchain network.
• Stablecoins: Some cryptoassets offered on the Uphold Platform are categorized as “stablecoins,” which means they are designed to maintain a stable value relative to a denominated fiat currency. A stablecoin pegged to a fiat currency is not the same as the underlying fiat currency, is not legal tender, and may lose its peg. There can be no assurance that a stablecoin will be able to maintain its value fixed to any denominated currency, particularly in moments of extreme volatility.
• Internet and Electronic Trading Risks: Utilizing an internet-based trade execution software application entails certain risks, including, but not limited to, potential hardware and software failures. For instance, in the event of an internet connection or equipment failure, you may encounter difficulties such as being unable to place an order, experiencing order execution deviations from your instructions, or the non-execution of your order altogether. Consequently, this may result in financial losses if the market for a specific cryptoasset experiences a sudden drop.
• User Error: Once a cryptoasset transaction has been executed to its respective network, we are generally unable to reverse the transaction. This applies even where you send your cryptoassets to an incorrect wallet or network. Your rights to report and seek recovery for an unauthorized, mistaken, or accidental transfer or exchange, including applicable notice deadlines and the basis for recovery, are described in the User Agreement.
• Cyber Security: Cryptoasset platforms have faced cyberattacks and encountered technical problems that led to the loss or theft of cryptoassets belonging to their users. Consequently, a similarly targeted cyberattack could potentially result in the theft or loss of your fiat currency or cryptoassets. In such circumstances, it might be challenging or even impossible to recover the lost funds or assets.
• Regulatory Risks: Legislative and regulatory changes or actions at the national or international level may adversely affect the use, transfer, exchange, and value of cryptoassets.
• No Government Insurance: Cryptoassets held in an Uphold account are not legal tender, are not backed by any government, and are not insured by the Federal Deposit Insurance Corporation (FDIC), the Securities Investor Protection Corporation (SIPC), or any other governmental insurer. For information about any private insurance coverage that may apply, and its limits and conditions, please see the User Agreement for more details. You should be prepared to lose some or all of the value of any cryptoassets you hold.

Stablecoins

What are they?

A stablecoin is a cryptocasset whose value is pegged to that of an underlying fiat currency, such as the Pound Sterling, US Dollar or Euro.

What are the risks associated with Stablecoins?

• Counterparty Risk: Stablecoins are backed by collateral (e.g., fiat currency), and relying on a third party to maintain the collateral introduces risk. This risk emerges if the third party faces insolvency or fails to maintain the required collateral.
• Redemption Risk: When a stablecoin claims redeemability for underlying collateral, there is a risk that the redemption process will not unfold as expected. This risk is particularly evident during periods of market volatility or operational challenges.
• Collateral Risk: The stability of a stablecoin is subject to the risk that the value of the collateral, which may be another type(s) of asset or cryptoasset(s), may decline or become volatile.
• FX Risk: Many stablecoins are denominated in US dollars, exposing you to fluctuations in the exchange rate between USD and other fiat currencies.
• Algorithm Risk: If the stablecoin relies on an algorithm to maintain stability (e.g., by adjusting supply based on demand), there is a risk that the algorithm will fail or behave unexpectedly. This scenario could cause the stablecoin to lose its stability and even its entire value.

Meme coins

Meme coins, derive value from community interest and online trends, often without any intrinsic value or utility.

What are the risks associated with Meme coins?

• Volatility Risk: Meme coins are prone to substantial and unpredictable price changes, often experiencing rapid fluctuations. Social media trends and celebrity endorsements can significantly influence their value, diverging from traditional investment fundamentals.
• Lack of Utility: Meme coins can sometimes lack intrinsic value or utility, relying more on community interest, online trends, and speculative trading to determine their worth.
• Market Manipulation: Meme coins face an elevated risk of market manipulation, including 'pump-and-dump' schemes, where prices are artificially inflated before a sudden crash.
• Lack of Transparency: Information about meme coins, such as details about development teams, goals, and financials, is often limited. This lack of transparency poses challenges in evaluating the credibility and potential of a meme coin accurately.
• Emotional Investing: Meme coins often evoke intense emotional reactions from investors, leading to impulsive decisions. This emotional trading activity has the potential to magnify losses in the market.

Defi tokens

Decentralized Finance (DeFi) tokens are linked to financial applications and protocols on decentralized blockchains.

What are the risks associated with DeFi tokens?

• Smart Contract Risk: DeFi tokens’ reliance on smart contracts exposes it to risks. Even a minor coding error or oversight could lead to the exploitation of a contract, potentially resulting in significant losses for DeFi tokens.
• Regulatory Risk: Operating in a decentralized manner, DeFi often lacks intermediaries or financial crime controls. Regulatory bodies across jurisdictions might introduce new regulations, affecting the use, value, or legality of certain DeFi protocols or assets.
• Rug-Pulls/Exit Scams: Some DeFi projects, initiated by anonymous or pseudonymous teams, heighten the risk of "rug pulls." In such cases, developers abandon the project, withdrawing funds and leaving investors with worthless tokens.
• Data/Oracle Risk: DeFi protocols often rely on external data sources or ‘oracles’. Manipulation or inaccuracies in these data sources can lead to unintended financial outcomes within the protocols.
• Protocol Complexity: The intricate nature of some DeFi protocols can pose challenges for average users to fully comprehend the mechanisms and associated risks.
• Lack of Liquidity: Certain tokens within DeFi exhibit very low liquidity, meaning slight changes in supply and demand can result in sharp price movements.

Staked cryptoassets

Staking is the process of locking up your cryptoassets to help secure a particular blockchain network in exchange for rewards. Staked cryptoassets play a crucial role in securing blockchain protocols and earning rewards.

What are the risks associated with Staked cryptoassets?

• Liquidity Risk: Certain protocols may require the locking of staked cryptoassets for a specified period, restricting your ability to swiftly access or sell your cryptoassets.
• Rewards Not Guaranteed: The reward rate derived from staking cryptoassets is contingent upon the relevant protocol and is neither guaranteed nor fixed and subject to variations over time.
• Protocol Risks: Staking protocols undergo frequent evolution. Modifications or updates to the consensus mechanism may bring forth new vulnerabilities or unforeseen outcomes.
• Slashing Risk: Engaging in cryptoasset staking involves the possibility of facing losses in the event of your validator being penalized by the network.

Cryptoassets Risk Summary

Cryptoassets, also referred to as cryptocurrency, virtual currency or digital assets, are a digital representation of value that function as a medium of exchange, a unit of account, or a store of value. Cryptoassets are not legal tender, are not backed by the government or a central bank and generally have no underlying assets, revenue stream, or other sources of value tied to fiat currency or other assets. Accounts and value balances are not subject to Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC) protections.

The value of a cryptoasset is derived from market dynamics and has historically been more volatile relative to fiat currency and other assets. The unpredictability of the price of cryptoassets relative to fiat currency may result in significant loss over a short period of time.

The value of cryptoassets may be derived from the continued willingness of market participants to exchange fiat currency for cryptoassets, which may result in the potential for permanent and total loss of value of a particular cryptoasset should the market for that cryptoassets disappear. In certain cases, it may be difficult or impossible to liquidate a position quickly at a reasonable price due to various market factors, including illiquidity or actions by trading facilities.

Legislative and regulatory changes or actions at the state, federal or international level may adversely affect the use, transfer, exchange, and value of cryptoassets. Several federal agencies have also published advisory documents surrounding the risks of cryptoassets.

Some cryptoassets transactions shall be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that the customer initiates the transaction. Cryptoassets ownership is often determined by a decentralized public ledger that associates an amount of cryptocurrency with a unique address defined by a public cryptographic key.

A private cryptographic key is required to transfer cryptoassets from one address to another. Anyone with access to the private key associated with the address that holds your cryptoassets can transfer the associated cryptoassets to a new address. Cryptoasset transfers generally cannot be canceled or reversed and the identity of the holder of the private key associated with any address can be difficult, if not impossible, to ascertain.

The nature of cryptoassets may lead to an increased risk of fraud or cyber attack. If you are using cryptoassets held on the Uphold platform to purchase goods or services, Uphold has no visibility into the sellers and cannot control delivery, quality, safety, or legality of your intended transaction.

Losses due to fraudulent or accidental transactions may not be recoverable. If you have a dispute with sellers or buyers, you agree to deal directly with them and hold Uphold blameless in all disputes. The nature of cryptoassets means that any technological difficulties experienced by Uphold may prevent the access or use of a user’s cryptoassets. Any bond or trust account maintained by Uphold for your benefit, if applicable, may not be sufficient to cover losses incurred by you. There is no assurance that a person who accepts cryptoassets as payment today will continue to do so in the future.