The Risks of Bitcoin

Bitcoin Risks Investors Should Know

The first risk – The volatility of Bitcoin

Everyone knows how volatile Bitcoin is, and those who invest in it will see the value of this cryptocurrency fluctuate quite dramatically. Unless you can handle the ups and downs of Bitcoin, investing in Bitcoin is not for you. There is little to be gained if losing your capital will cause you to lose sleep. I cannot stress enough the importance of using your discretionary money to play the cryptocurrency market.

What is discretionary spending?

This is money spent on travel, eating out, entertainment, hobbies and sports.

You would never spend the rent money or the money that was set aside for your retirement on entertainment such as a race day, so you shouldn’t use that money to play the cryptocurrency market either.

Risk two-Hacking

A company called “Cryptopia”, which was an online bitcoin trading platform, held funds invested in bitcoins. It was hacked and everyone who owned Bitcoins invested with Cryptopia lost their money. There were some sad stories about the large amount of money lost by some individuals.

It bears repeating that you should never play cryptocurrency with funds you cannot afford to lose or put too many eggs in one basket, as many of these investors seem to have done.

The other thing I should add is that the actual amount of money lost by crypto investors is likely to be greatly inflated due to the rising price of Bitcoin. If someone invests $1,000 in Bitcoin and it goes up to $10,000 in a few years only to lose the lot. It will be recorded that this person lost 10,000 when in reality he only lost 1,000.

Risk three – Lost passwords

An Australian man is locked out of his Bitcoin wallet because he can’t even remember his password. The website where he has his bitcoins will permanently block him from his wallet if he has made ten failed login attempts. He has done eight. He has over 300k in his bitcoin wallet.

The lesson here is to write down your password and keep it locked away in a safe place.

The other tip is to diversify your portfolio so that if something goes wrong, you don’t lose too much in one fell swoop.

Risk Four – Government Control

Governments have the ability to ban crypto trading; China did just that. Several agencies in China have joined forces to ban what they describe as “illegal” cryptocurrency activity. This does not mean that other countries will follow suit, but it simply illustrates a point that governments have the power to do so.

Risk Five – Taxation

Two things in life are certain, death and taxes. You can be sure that at some point the taxman will demand a piece of your Bitcoin pie. Whether it’s in the form of capital gains tax or the increased value of Bitcoin. It should be remembered that if you are taxed on the capital gains of your Bitcoin, then it may be possible to claim tax back on any capital losses. A good accountant will be able to advise you here.

Whatever form of capital gains you invest in, you should always remember that when there is an opportunity for capital gains, there is also an opportunity for capital loss. Investing in cryptocurrency is risky, therefore it cannot be emphasized enough that the money you invest in Bitcoin should be money you can afford to lose.