Investing in Bitcoin and other cryptocurrencies can be very profitable. One need look no farther than the bull run of 2017 which sent the value of digital tokens soaring. Even though prices fell back to earth and have only in 2019 shown some recovery, historically cryptocurrency offers an impressive return. Those who bought Bitcoin for less than $100 would agree that the digital currency has been a good investment, but there are risks when investing in Bitcoin.
Investing in any asset class whether it be gold, stocks, or Bitcoin has an inherent level of risk. Because Bitcoin is a virtual asset the risks can be somewhat different than they are for other assets. Let’s take a look at the top risks when investing in Bitcoin.
Financial Loss
This risk is common to all types of investing and not exclusive to Bitcoin. The difference is that cryptocurrency markets have shown high levels of volatility. Just consider the example we mentioned above about the 2017 market. Many people bought in to capitalize on the huge uptick in value, only to be wiped out a few months later when the market crashed.
Some have speculated that the value of Bitcoin will surpass $20,000 at some point in the near future. Other analysts have predicted it will fall back to $600. Making an investment in Bitcoin requires you to speculate about where the value of the currency is headed.
Limited Usage
There is no question that cryptocurrency is the future of monetary exchanges. There are simply too many advantages to a global method of trading goods and services for a cryptocurrency that is not subject to physical borders. Even mainstream financial experts will agree that a cashless society is coming at some point in the future.
For now, however, spending Bitcoin can be a challenge in some cases. The crypto token is still hampered by limited usage. More retailers are opening their cash drawers to Bitcoin, but the process has been slow. It could take a few more years before paying with Bitcoin is the norm instead of the exception. Until that happens the value of Bitcoin may be capped at a certain level. One has to also consider that the enthusiasm about digital currency is misplaced, but this is very unlikely.
Little Historical Data
Bitcoin first made its appearance in 2009, just ten short years ago. Stock investors are fond of what is called historical data. This data is complied from years of stock market movements. For example, you can track the performance of the S&P 500 for many years. This historical data is used to predict future market movements, and it can be pretty reliable.
Because Bitcoin is such a young asset there is little historical data to analyze. There simply has not been enough time yet to make long-term projections about how the asset will perform. What we do know is that the historical data compiled thus far shows that Bitcoin is capable of amazing returns. The next few years should help to paint a better picture for market speculators.
Cyber Crime
There is no way to avoid a discussion of this risk of investing in Bitcoin. Because Bitcoin is a virtual asset it is susceptible to virtual theft. From the hacking of the cryptocurrency exchange Mt. Gox a few years ago to attempted hacks on exchanges today, cryptocurrency stored in online wallets can be vulnerable to threats from cyber criminals.
With that being said it remains true that Bitcoin is a safe asset to hold. When the proper precautions are taken there is almost no way one can simply lose their Bitcoin. There are methods today of storage like hardware wallets that do not need to be continuously connected to the Internet and can be carried on one’s person.
Growing Pains
It is sometimes easy to forget that Bitcoin has only been around for about 10 years. Anything that new, especially a type of money, is going to face some significant growing pains as it matures. Bitcoin is not immune to the challenges of growth, and we have seen that primarily in the issue of scaling. The processing time for transactions can be very slow compared to payments that are made by a credit or debit card.
For Bitcoin to become accepted as a means of exchange by many retailers, the transaction processing will have to improve. The cryptocurrency community of developers is aware of this and is working the problem. Some solutions like the Lightning Network have made strides in cutting down processing times. Other cryptocurrencies are resolving this issue from the beginning. Still, it could take a few years for the growing pains to stop.
Regulation Issues
The whole idea behind Bitcoin and other cryptocurrencies is that they are decentralized platforms. There are no standardized major regulations for the Bitcoin and cryptocurrency market. Many fans of crypto like it just that way and don’t want this to change. Unfortunately, big government has started to take notice of crypto and may try to attempt regulations at some point.
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The problem with Bitcoin and governments is that they really don’t know how to handle or control it, and governments hate a lack of control. There have been some measures in some countries to get a handle on Bitcoin, but the efforts have been mostly lackluster. Investors should simply be aware that attempts at regulation could affect the value of their investment.
Taxation
This is another problem that cryptocurrencies face. The market is new, and as we mentioned the government doesn’t really have a clear picture. This includes ideas on how to tax cryptocurrency investments. At the present time cryptocurrency itself is not taxed, and that makes it appealing to many investors. It can be taxed as a capital gain, though, when sold through an exchange.
The gray area where taxes are concerned is problematic, especially for those who are investing large sums of money in crypto. In time there will be changes to the tax code which will specifically address cryptocurrency investing. Until then, investors should seek the advice of tax professionals with some cryptocurrency knowledge at tax time.
Do the Benefits of Investing in Bitcoin Outweigh the Risks?
We don’t want to sound negative in our appraisal of the top risks of investing in Bitcoin. In our opinion Bitcoin is a strong investment which has tremendous upside potential. Yet it is an asset class that demands its own special considerations of risk.
The investor will ultimately have to decide for themselves if the benefits of Bitcoin investing outweigh the risks. This is going to be determined by the goals of each investor and their own personal risk threshold. It is also correct to say that there are some types of Bitcoin investments that carry more risk than others. It is now possible to trade options and futures on many crypto exchanges. These have always been risky vehicles in any market.
Make the right determination for you, but don’t get left behind. Bitcoin is still young and has plenty of room to grow. You will be unhappy if you did not get in while there was still an opportunity to make a large profit.
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