If you ask anyone on their stance on Bitcoin, you will find different answers. Some would say that Bitcoin and cryptocurrency, in general, is a signal of the new era of “money.” On the other hand, some would argue that cryptocurrency is nothing but a bubble that will very likely burst sooner rather than later. However, no matter how you look at it, Bitcoin is here to stay. (Or at least for now.) So if you’re ready to jump on the bandwagon and thinking of investing in this cryptocurrency, you will need to educate yourself first. What are the risks involving Bitcoin and just how precisely risky is it? Let’s find out.
What is Bitcoin?
In 2009, a group of anonymous programmers invented Bitcoin. Fast forward a couple of years later, and it is now the biggest cryptocurrency in the world. Bitcoin is exchanged online, directly from one party to the other using a worldwide digital payment network. Bitcoin, unlike cash, works without centralized third-party entity like banks or government. Instead, transaction records are held in a digital public ledger known as a “blockchain.” Bitcoin is much like physical gold in this sense. Aside from not being backed by a central bank, Bitcoin’s value is also determined through its scarcity and public trust. These factors determine Bitcoin’s store of value and hedge against inflation.
Why is Bitcoin so valuable?
2017 was perhaps the best year for Bitcoin. And there are many reasons why its value continues to inflight. For one, the potential of the blockchain technology is undeniable. This decentralized ledger of records is an open-source network, which makes it impossible for data to be changed without anyone else noticing. This makes cryptocurrency highly-secure. Other factors may include the weakening of the US dollar, the continued growing acceptance of Bitcoin as a means of payment, and everyone who just doesn’t want to miss the bandwagon.
Why is Bitcoin so volatile?
While Bitcoin’s value has risen, it doesn’t lessen the fact that it continues to be extremely volatile. This 2018, the price of a single bitcoin sits at around $7,000. There is currently about $117 billion worth of Bitcoins in circulation. This price level exceeds even the market capitalization of giants like Nike. But all of these facts only contribute to Bitcoin’s volatility. In the span of five months, Bitcoin has experienced three bear-market-like crashes.
According to Randy Frederick, Vice President of Trading and Derivatives at Schwab, “Because Bitcoin is limited to 21 million coins, and an estimated four million have already been lost, there is a large demand and a relatively small supply. Typically, that is a recipe for high volatility.”
The Biggest Risks To Bitcoin
1. It’s Blockchain May Lose Its Appeal
One of the reasons why Bitcoin’s value continue to increase is because of the potential of blockchains. Currently, in an effort to attract investors, an upgrade caused some information to be moved off of blockchains to boost capacity, transaction settlement times, and transaction fees. But what if blockchains fail? Bitcoins price could suffer a massive blow.
2. Financial Loss
Even the tiniest fluctuation on the cryptocurrency can result in significant financial losses to Bitcoin owners and investors. And the higher its volatility becomes, the riskier the losses get. Bitcoin continues to be relatively unstable, which means investors are either going to get huge profit or huge losses. For many people who can’t afford to risk their investment, financial failure could be catastrophic.
3. Cybercrime
In 2011, the largest Bitcoin exchange in the world, “Mt. Gox,” suffered a massive security breach which resulted in the loss of $450 million worth of Bitcoin. And just last year, another cryptocurrency called Tether reportedly lost $31 million in cybertheft.
4. No regulation
Because Bitcoin is relatively new and does not use a centralized system, its regulatory environment can be sensitive. In fact, many businesses of illegal nature use Bitcoin for their financial transactions, adding to its volatility. On the other hand, if bigger entities like China and South Korea nix initial coin offerings, it could result in increased regulation. This can either improve or hinder Bitcoin’s value.
Conclusion All of these risks can mean one thing: Only Invest in Bitcoin if you can afford to lose. It’s true that people are getting good profits out of Bitcoin trading and mining. However, the risks are just too high. You never know when the BTC bubble might burst, if at all. If you really want to invest in Bitcoin, follow the number one rule in investment. Diversify.
A big shout out to Michael for contributing this article. He strives to make press release Newswire the disrupter in the PR and Marketing space, allowing businesses to attract media attention without the need for high-priced agencies.
