Risks of Bitcoin Investing
Though Bitcoin was not designed as a normal equity investment (no shares have been issued), some speculative investors were drawn to the digital money after it appreciated rapidly in May 2011 and again in November 2013. Thus, many people purchase bitcoin for its investment value rather than as a medium of exchange.
The concept of a virtual currency is still novel and, compared to traditional investments, Bitcoin doesn't have much of a longterm track record or history of credibility to back it. With their increasing popularity, bitcoins are becoming less experimental every day; still, after 10 years, they (like all digital currencies) remain in a development phase and are consistently evolving. "It is pretty much the highest-risk, highest-return investment that you can possibly make,” says Barry Silbert, CEO of Digital Currency Group, which builds and invests in Bitcoin and blockchain companies.
Bitcoin Regulatory Risk
Investing money into Bitcoin in any of its many guises is not for the risk-averse. Bitcoins are a rival to government currency and may be used for black market transactions, money laundering, illegal activities, or tax evasion. As a result, governments may seek to regulate, restrict, or ban the use and sale of bitcoins, and some already have. Others are coming up with various rules. For example, in 2015, the New York State Department of Financial Services regulation that would require companies dealing with the buy, sell, transfer, or storage of bitcoins to record the identity of customers, have a compliance officer, and maintain capital reserves. The transactions worth $10,000 or more will have to be recorded and reported.
Security Risk of Bitcoins
Most individuals who own and use Bitcoin have not acquired their tokens through mining operations. Rather, they buy and sell Bitcoin and other digital currencies on any of a number of popular online markets known as Bitcoin exchanges. Bitcoin exchanges are entirely digital and, as with any virtual system, are at risk from hackers, malware, and operational glitches. If a thief gains access to a Bitcoin owner's computer hard drive and steals his private encryption key, he could transfer the stolen Bitcoins to another account. (Users can prevent this only if bitcoins are stored on a computer which is not connected to the internet, or else by choosing to use a paper wallet – printing out the Bitcoin private keys and addresses, and not keeping them on a computer at all.) Hackers can also target Bitcoin exchanges, gaining access to thousands of accounts and digital currency where bitcoins are stored.
This is particularly problematic once you remember that all Bitcoin transactions are permanent and irreversible. It's like dealing with cash: Any transaction carried out with bitcoins can only be reversed if the person who has received them refunds them. There is no third party or a payment processor, as in the case of a debit or credit card – hence, no source of protection or appeal if there is a problem.
Insurance Risk
Some investments are insured through the security investor checker. Normal bank accounts are insured through the (FDIC) up to a certain amount depending on the jurisdiction. Generally speaking, Bitcoin exchanges and Bitcoin accounts are not insured by any type of federal or government program. In 2019, prime dealer and trading platform SFOX announced it would be able to provide Bitcoin investors with FDIC insurance, but only for the portion of transactions involving cash.
Risk of Bitcoin Fraud
While Bitcoin uses private key encryption to verify owners and register transactions, fraudsters and scammers may attempt to sell false bitcoins. For instance, in July 2013, the SEC brought legal action against an operator of a Bitcoin-related Ponzi scheme. There have also been documented cases of Bitcoin price manipulation, another common form of fraud.
Market Risk
Like with any investment, Bitcoin values can fluctuate. Indeed, the value of the currency has seen wild swings in price over its short existence. Subject to high volume buying and selling on exchanges, it has a high sensitivity to “news." According to the CFPB, the price of bitcoins fell by 61% in a single day in 2013, while the one-day price drop record in 2014 was as big as 80%.
If fewer people begin to accept Bitcoin as a currency, these digital units may lose value and could become worthless. Indeed, there was speculation that the "Bitcoin bubble" had burst when the price declined from its all-time high during the cryptocurrency rush in late 2017 and early 2018. There is already plenty of competition, and though Bitcoin has a huge lead over the hundreds of other digital currencies that have sprung up, thanks to its brand recognition and venue capital money, a technological break-through in the form of a better virtual coin is always a threat.
Bitcoin Forks
In the years since Bitcoin launched, there have been numerous instances in which disagreements between factions of miners and developers prompted large-scale splits of the cryptocurrency community. In some of these cases, groups of Bitcoin users and miners have changed the protocol of the Bitcoin network itself. This process is known as "forking" and usually results in the creation of a new type of Bitcoin with a new name. This split can be a "hard fork," in which a new coin shares transaction history with Bitcoin up until a decisive split point, at which point a new token is created.
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