The Risks of Investing in Bitcoin

by Trading 101     Aug 03, 2019

7 mins read

Bitcoin (BTC) ) is the first cryptocurrency to market and has paved the way for the creation of better cryptocurrencies (altcoins). While it is the oldest, it has maintained its position as the most profitable cryptocurrency. At first sight, it seems as though an investment in Bitcoin would be obvious for any intelligent investor to pursue. Cryptocurrency is showing more and more potential of gradually taking over fiat currencies; and any intelligent investor would want to be part of laying the groundwork for the cryptocurrency takeover. However, with astronomical gains come equally astronomical risks. Here are five reasons why investing in Bitcoin can be risky.

1. Blockchain’s novelty is dwindling

Bitcoin’s blockchain technology used to be more popular because it had no competition. Now, however, after making a disappointing upgrade following the division of bitcoin into Bitcoin and Bitcoin Cash, it has been losing leverage in the market.

150 companies have instead been testing Ethereum’s new blockchain, due to the fact it supports small contracts that allow for some degree of accountability to remain in the modern business world. If Bitcoin’s blockchain fails to provide interesting updates that keep users happy and interested, Bitcoin’s customer base may start dwindling.

2. Limited use in purchasing goods

Companies first started supporting Bitcoin by allowing it as a payment method in 2014. Coming to terms with the advances in technology and the future of currency was necessary for many businesses that wanted to provide options for Bitcoin-carrying customers. However, even as of June 2019, only a limited number of companies are accepting Bitcoin in exchange for goods or services.Two of the few major companies that has supported Bitcoin as payment from the beginning include Microsoft and Overstock.

3. Regulation biting Bitcoin in the butt

The regulation of Bitcoin allowed consumers and investors in the cryptocurrency to trust it as well as take it more seriously. Regulation was not easy for Bitcoin to achieve. As the first cryptocurrency to hit the market, everyone was hesitant about whether it could actually work as a currency. However, as of 2017, Japan has officially labelled bitcoin as a currency just as trusted as fiat currency, both seen as legal options for payment throughout the country. Nasdaq has helped in regulating bitcoin as well, acquiring bitcoin futures in late 2017.

The regulation of bitcoin has not always benefited the digital currency, however, causing both China and South Korea to remove ICOs from their respective countries, China banning cryptocurrency exchanges within its borders as well.

4. Hacking

Bitcoin, as well as every other cryptocurrency on the market, is constantly at risk of becoming hacked by some of the world’s smartest hackers. When Mt. Gox had 70% of Bitcoin’s trading volume about four years ago, hackers decided to work their magic. Mt. Gox suffered a $850,000 loss worth of Bitcoin in 2014. This hack affected the status of Bitcoin, declining 80% in value as a result of the event. As of June 2018, it seems like matters regarding its rehabilitation has been resolved as Mt. Gox’s creditors are said to be repaid their cryptocurrency holdings at the time of the collapse. In more recent events, South Korean crypto exchange Bithumb lost approximately $13 million worth EOS (EOS) and $6.2 million worth Ripple (XRP) just March of this year. Even the largest crypto exchange Binance suffered a 7,000 Bitcoin loss due to a “large scale security breach” May of this year.

5. The duality of decentralization

One of Bitcoin’s selling points is its ability to perform decentralized and unregulated transactions. This means it allows complete control over transactions without third parties being involved. It also affords anonymity to its users so your transactions cannot be traced back to you. The pitfall of unregulated transactions with no centralization means no one is able to keep you or your business safe from possible fraud. If your funds are to be hacked the same way several cryptocurrency exchange platforms have already been hacked, there is no way to recover your funds or find the culprit. It will also prove difficult to keep your funds safe since nothing is attaching you to your coins. While it is beneficial in the sense that it ensures anonymity and privacy, you also risk losing all your funds at the drop of a hat.

The stories of Ross Ulbricht and Charlie Shrem should teach you everything you need to learn about the risk of investing in Bitcoin. Ross Ulbricht was the pseudonym used by the creator of Silk Road. If you are not aware of what this website is all about, here is a brief overview. Silk Road is a place where buyers and sellers went to complete transactions involving illegal drugs and firearms using bitcoin. Its most popular years as an online market were 2011 through 2013. While drug lords and addicts alike benefitted from the website, authorities were obviously not happy. In 2013, Ulbricht was found and sentenced to life in prison for money laundering and drug trafficking. Charlie Shrem created BitInstant, a cryptocurrency exchange platform, when he was only 19. Its claim to fame is the Winklevoss brothers $1.3 million investment in the exchange. Things were going great until he started allowing payments on Silk Road. Like Ross Ulbricht, he was sentenced to jail, albeit only for two years.

Any type of investment has its risks and Bitcoin just comes with a longer list of risks. Since it is decentralized and volatile in nature, one should take additional measures to mitigate these risks. If you are new to investing in Bitcoin, you can read (insert Tips for New Investors link here) for tips on how to successfully navigate the cryptocurrency world.

Get unlimited access to our Learning Center,
Broker Insights and Exclusive Promotions for Free!