Nicholas Roberts
The almost-unbelievable boom in bitcoin’s value in 2011 and in 2013 has attracted many investorsto its investment value rather than its potential to be a mainstream medium of exchange. However, since bitcoins lack the guaranteed value and their digital nature also means that the purchase and use of bitcoin carry inherent risks. You may want to be keen on the following risks before you invest in bitcoins.
Regulatory Risks
At present, it’s well-known that bitcoin is the rival of government-backed fiat currencies. Bitcoins have also been used for black market transactions such as illegal activities, tax evasion, and money laundering.
So it’s not surprising that governments seek to regulate, restrict, or ban the use and sale of bitcoins.
Some already did just that.
Meanwhile, others are coming up with a variety of rules. For instance, in 2015, the New York State Department of Financial Services finalized regulations that would require companies dealing with the buy, sell, transfer, or storage of bitcoins to record the identity of the customers. They also need to have a compliance officer and maintain capital reserves. Transactions amounting to more than $10,000 or higher should be recorded and reported.
The bigger picture is quite obvious: the lack of uniform regulations about bitcoins and other virtual currencies raises questions about their liquidity, longevity, and universality.
Security Risks
Bitcoin exchanges are completely digital and therefore they’re always at risk of being hacked. They can also encounter operational glitches and malware. If a thief obtains access to a user’s computer hard drive and steals his private encryption keys, he could transfer the stolen coins to another account.
Users can prevent that by storing the bitcoins on a computer unplugged to the internet or by using a paper wallet.
Bitcoin exchanges can also be hit by hackers. And if that happens, these criminals gain access to possibly thousands of accounts and digital wallets where bitcoins are kept.
To add insult to the injury, all bitcoin transactions are permanent and irreversible. A transaction can only be technically reversed if the person who received the bitcoins chooses to refund them back to the owner. And that’s a charity hackers are not known to do.
Market Risk
Like with many investments, bitcoin values can fluctuate. Indeed, the value of the currency has witnessed wild swings in price over its short existence. Not surprisingly, bitcoin has wild sensitivity to news, since it’s subject high volume buying and selling.
If fewer people start accepting bitcoin as a currency, these digital units may lose value and could become worthless. You might not believe it, but bitcoin already has a lot of competition. Hundreds of other digital currencies have appeared. And even if bitcoin has quite a lead over these “altcoins,” technological advancement in the form of cryptocurrency is always possible and therefore a huge threat.
Fraud Risk
Even though bitcoin users use private key encryption to verify owner and register transactions, fraudster and scammers may still attempt to sell fake bitcoins. For example, the Securities and Exchange Commission brought legal actions against an operator of a bitcoin-linked Ponzi scheme.
