Crypto-assets Risk Overview

Cryptoassets vary in their characteristics and risks. Before buying, ensure you understand the specific risks.

General risks common to all crypto-assets

What are the risks associated with crypto-assets generally?

• Volatility and Liquidity Risks: Crypto-assets are known for their high volatility which refers to rapid and significant price fluctuations that may be experienced over short periods of time. Crypto-asset markets are often driven by speculation and sentiment leading to rapid price movements based on market perceptions, positive or negative, based on news and rumours. It is essential to consider your individual risk tolerance and investment goals before engaging with crypto-assets. During periods of high volatility, you may be unable to buy or sell any crypto-assets.
• 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 crypto-assets will persist over time. Additionally, the crypto-asset ecosystem is rapidly developing in a competitive market, demand for any crypto-asset 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 crypto-assets, resulting in various issues such as impaired functionality, compromised user information, and theft of crypto-assets. Additionally, the cryptographic foundations of any crypto-asset may prove to be flawed or inadequate over time.
• Concentration Risks: Depending on the consensus mechanism used by a particular blockchain, In the event that an individual or entity acquires control of more than 51% of the computing power (hash rate) utilised by a blockchain network, they would possess the ability to exploit this majority control to engage in double spending of their crypto-assets. This is known as a “51% attack”, and, if successful, it would severely undermine confidence in public blockchain networks such as Bitcoin or Ethereum or any impacted blockchain network. Consequently, the value of the crypto-asset impacted would likely experience a significant decline.
• Stablecoins: Some of the crypto-assets offered on the Uphold Platform are categorised as “stablecoins” meaning they are designed to maintain a fixed value relative to the denominated fiat currency. Prior to listing any stablecoin, Uphold performs comprehensive due diligence to evaluate the verification of the stablecoin’s reserves, whether the reserves are maintained in a regulated financial institution and the risk of the stablecoin being considered a security or derivative under applicable laws. That being said, there is no assurance that a stablecoin is able to maintain its value fixed to any denominated currency in moments of extreme volatility.
• Internet and Electronic Trading Risks: Utilising 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 crypto-asset experiences a sudden drop.
• User Error: Once a crypto-asset transaction has been executed to its respective network, or if the user sends their crypto-assets to an incorrect wallet or network, we are unable to reverse the transaction. In the unfortunate event of fraudulent or accidental transactions, any resulting losses are not recoverable.
• Cyber Security: Crypto-asset platforms have faced cyberattacks and encountered technical problems that led to the loss or theft of crypto-assets belonging to their users. Consequently, a similarly targeted cyberattack could potentially result in the theft or loss of your fiat currency or crypto-assets. 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 crypto assets.
• No Investor Protection: Crypto-assets held in an Uphold account do not benefit from the protection provided by the Financial Ombudsman Service (FOS), or the Financial Services Compensation Scheme (FSCS) if something goes wrong. You should be aware and prepared to potentially lose some of all of your money.

Stablecoins

What are they?

A stablecoin is a cryptocurrency 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: These assets 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 party faces insolvency or fails to maintain the required collateral.
• Redemption Risk: When an asset claims redeemability for underlying collateral, there is a risk that the redemption process won't unfold as expected. This risk is particularly evident during periods of market volatility or operational challenges.
• Collateral Risk: The stability of the asset is subject to the risk that the value of the collateral, which may be another type(s) of asset or crypto-asset(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 asset relies on an algorithm to maintain stability (e.g., by adjusting supply based on demand), there's a risk that the algorithm will fail or behave unexpectedly. This scenario could cause the asset to lose its stability and even its entire value.

Stablecoins on Uphold¹: RAI, EURC, TUSD, GUSD, USDC, BUSD, DAI, PYUSD, USDT, LUSD, FRAX, MIM, USDP.

Memecoins

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.

Memecoins on Uphold¹: BONE, DOGE, TURBO, LUNC, BONK, SHIB, PEPE

Defi tokens

Decentralised Finance (DeFi) tokens, such as UNI and AAVE, are linked to financial applications and protocols on decentralised blockchains.

What are the risks associated with Defi tokens?

• Smart Contract Risk: DeFi's 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 decentralised 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 coins within DeFi exhibit very low liquidity, meaning slight changes in supply and demand can result in sharp price movements.

DeFi tokens on Uphold¹: YFI, MKR, GNO, TRB, AAVE, KP3R, COMP, ORDI, GMX, INV, RPL, INJ, ALCX, MLN, LINK, ENS, FXS, UNFI, MOVR, UNI, ORCA, SNX, BAL, GNS, BADGER, CVX, EUL, DYDX, JTO, CAKE, LDO, UMA, CTX, BAND, GFI, LQTY, SUSHI, STX, ORN, BNT, KNC, PERP, SD, RAY, CRV, JOE, WCFG, CELO, PICKLE, ZRX, 1INCH, RBN, FIS, GLMR, HFT, DIA, MAV, RDNT, LRC, FX, EVMOS, ALPHA, LTX, $ADS, ASTR, SRM, TRU, CLV, HOP, FOX, ANKR, T, AMP, RSR, XCN, UPT, SPELL.

Staked crypto-assets

Staked crypto-assets², like staked ETH, play a crucial role in securing blockchain protocols and earning rewards.

What are the risks associated with Staked crypto-assets²?

• Liquidity Risk: Certain protocols may require the locking of staked assets for a specified period, restricting your ability to swiftly access or sell your assets.
• Rewards Not Guaranteed: The reward rate derived from staking assets 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 asset staking involves the possibility of facing losses in the event of your validator being penalized by the network.

Staking crypto-assets at Uphold¹: ATOM, DOT, SGB, KSM, ZIL, CSPR, FLR, INJ, NEAR, SOL, AVAX, ETH, XTZ, ADA, ROSE, HBAR, MATIC

Crypto-assets Risk Summary

Crypto-assets also referred to as cryptocurrency, are a digital representation of value that function as a medium of exchange, a unit of account, or a store of value. Crypto-assets 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. 

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

The value of crypto-assets may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency 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 cryptocurrencies. Several federal agencies have also published advisory documents surrounding the risks of virtual currency. For more information see the Financial Conduct Authority’s Investor Alerts, CFPB’s Consumer Advisory, the CFTC’s Customer Advisory, the SEC’s Investor Alerts and FINRA’s Investor Alerts.

Some crypto-assets 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. Crypto-assets 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 cryptocurrency from one address to another. Anyone with access to the private key associated with the address can transfer the associated cryptocurrency. Crypto-asset 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 crypto-assets may lead to an increased risk of fraud or cyber attack. If you are using cryptocurrency held on the Uphold platform to purchase goods or services, we have no visibility into the sellers and cannot control delivery, quality, safety, or legality. 

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 crypto-assets means that any technological difficulties experienced by Uphold may prevent the access or use of a user’s cryptocurrency.