The Risks Of Investing In Bitcoin

Knowing the risks before investing in bitcoins

Bitcoin has been attracting speculative investors due to its rapid price appreciation. Thus, many individuals purchase Bitcoin primarily for its investment potential rather than its utility as a means of exchange. The purchase and use of bitcoin are subject to certain risks because of its digital nature and instability. Some governments have issued numerous investor alerts.

Should You Invest in Bitcoin?

Know these risks before you invest in Bitcoin:

✅ Bitcoin is Incredibly Volatile

Bitcoin is incredibly volatile due to its short history. A new concept takes time to settle and become widely accepted, and the same is true of cryptocurrencies. Trading Bitcoin can therefore be extremely risky. The bitcoin price can fluctuate dramatically within a day or even minutes. For instance, during a single day in 2013, Bitcoin’s price dropped by 61%, while the record drop for one day in 2014 was as high as 80%.

✅ Bitcoin is not Money

Another reason why bitcoin is so risky is the fact that it is a tradable asset, but it does not have any backing. It has value only because those trading it claims that it does. No government or regulatory body is supporting Bitcoin’s value. As a result, the value is mainly fictitious. If fewer people accept Bitcoin as a form of currency, the value of these digital units may decrease. As the price of bitcoin declined from its all-time high in late 2017 and early 2018, there was some speculation that the bitcoin bubble had burst.

✅ Regulatory risk

There is the possibility that people use Bitcoin for illegal activities, money laundering, or tax evasion. Governments may, therefore, seek to regulate, restrict, or even ban the use and sale of Bitcoin.

For example, the New York State Department of Financial Services finalized regulations in 2015 requiring companies that buy, sell, transfer, or store Bitcoin to keep records of customer ids, make provision for a compliance officer, and maintain capital reserves. It is mandatory to record and report any transaction worth more than $10,000.

It raises questions about the longevity, liquidity, and universality of Bitcoin (and other virtual currencies) in the absence of uniform regulation.

✅ Security risk

Bitcoin is generally not acquired through mining operations by individuals who own and use the cryptocurrency. Instead, they buy and sell Bitcoins and other digital currencies on popular online marketplaces, known as Bitcoin exchanges or cryptocurrency exchanges.

Bitcoin exchanges are entirely digital and can be hacked, infected by malware, and may encounter operational issues. Theft of an encryption key could enable a malicious hacker to transfer the stolen Bitcoins to another account if they gained access to a Bitcoin user’s computer hard drive.

In addition to Bitcoin exchanges, hackers may target digital wallets and accounts related to Bitcoin exchanges. There was a significant incident in 2014 when Mt. Gox, a Japanese bitcoin exchange, was forced to close due to the theft of millions of dollars worth of Bitcoins.

Considering that all Bitcoin transactions are permanent and irreversible, this is particularly problematic. It is akin to dealing with cash. Reversing a Bitcoin transaction is only possible if the recipient refunds the transaction. The payment process is not handled by a third party, as with a debit or credit card. There is, therefore, no means of protection or appeal if there is a problem.

✅ Insurance risk

The Federal Deposit Insurance Corporation (FDIC) insures bank accounts for up to a certain amount in most jurisdictions. Also, investments may be insured through the Securities Investor Protection Corporation (SIPC). However, Bitcoin exchanges or Bitcoin accounts are not protected in the same manner.

✅ Fraud risk

It is possible to sell counterfeit Bitcoins even though Bitcoin encrypts private keys to verify owners and record transactions. Bitcoin price manipulation is another common fraud.

Conclusion

Due to the risks above, many financial advisors advise against investing a large share of your portfolio into Bitcoin. Instead, they recommend investing no more than 1% to 10% if you are passionate about Bitcoin.

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