Bitcoin 101: Risks Every Investor Might Encounter

Bitcoin, the first crypto to be ever developed, is an electronic version of traditional money; the main difference is that this type of currency undergoes a process known as cryptography. Bitcoin goes through a series of encoding and decoding information, which later on led to the term cryptocurrency. Since its development in 2009 by an anonymous person under the nickname Satoshi Nakamoto, this digital currency has not only made millions of individuals and firms earn a profit, but has also impacted the future of business and finance.

Unlike conventional currencies like the US dollar or Japanese yen, Bitcoin and other cryptocurrencies are not associated with third-party agents such as central banks or the government. All the transactions performed by millions of its users are stored on an online ledger known as the blockchain, a network that securely records all transactions, which can be accessed by traders anytime.

Bitcoin 101: Risks Every Investor Might Encounter

Since there are no physical cryptocurrencies, all balances and transactions are kept on the blockchain or public ledgers everyone has access to.

It’s a given that in every investment, risks are never out of the picture - and the field of cryptocurrency is no exception. To be a successful investor, it’s important to take note and understand the different types of risks in the market.

Whether you are a beginner who is interested in investing in Bitcoin or someone who has experience but would like to know more about the first cryptocurrency, you’re in the right place. We’ve come up with a guide about the common risks that Bitcoin investors might encounter.

How Bitcoin Started

Bitcoin 101: Risks Every Investor Might Encounter

Before we discuss the risks in investing in Bitcoin, let’s go back to its history and learn how the first crypto started. The mystery of Bitcoin being a potential method of gaining profits has caught the attention and interest of the public. Now, many people wish to understand and learn about this new system. Since its development, more and more traders and investors alike have gained substantial profits from Bitcoin despite the volatile market.

Bitcoin was also a victim of the market’s fluctuating nature. In November 2020, its exchange rate suffered a sharp decline, but five days later, it set a new record with an all-time high value of $19,157 - a whopping 177% year-to-date increase. It was reported that in March 2021, Bitcoin reached yet another all-time high as its value increased to $60,000.

Thanks to Bitcoin, several other cryptocurrencies referred to as altcoins also emerged, leading to more and more companies accepting cryptocurrencies as a payment option. Huge companies and famous entrepreneurs have shown great interest in Bitcoin as well: Elon Musk of Tesla informed the public that the company would accept BTC as payment for all its car models in the US, as did fast-food chains such as Tim Hortons, Popeyes, and Burger King.  Big tech companies are also starting to accept this new payment option; just by 2021, Paypal announced that their users could buy, sell, and store cryptocurrencies.

Similar to all forms of financial investment and trading, cryptocurrency or investing in Bitcoin also comes with risks. The potential of traders - both beginners and experienced - to experience massive losses and gains are very high. In fact, even cryptocurrency trading websites like Bitcoin Profit frequently warn their customers that crypto trading is definitely not suitable for everyone because of the high risks. 

Bitcoin Investment Risks

Compared to traditional currencies, digital currency is still new and has wide room for development - similar to other online currencies, crypto remains in the development and pioneering phase. Given the wise words of the CEO of Digital Currency Group, Barry Silbert, “It is pretty much the highest-risk, highest-return investment that you can make.” To give you an idea, here are the five types of risk you may come across during the duration of your Bitcoin trading career.

1. Security 

Despite having online cryptocurrency exchanges, a huge percentage of Bitcoin users prefer to buy and sell their cryptos on a different trading platform. With the advancement of technology, people are enjoying the convenience of accessible and virtual financial exchanges, and centralised banks are now restructured to the different online platforms where online banking started. 

These forms of transactions involve risk, which means so do cryptocurrencies. Since Bitcoin exchanges are entirely automated, the system is at risk from malware, hackers, and operational glitches. In addition, the chance of hackers targeting online bank transactions is also categorised as a risk in Bitcoin exchanges.

Bitcoin 101: Risks Every Investor Might Encounter

2. Regulation

Similar to other trading and financial investment, capitalising in Bitcoin is not for cautious traders. It’s established that the government does not regulate bitcoins; though at times when they are utilised for black market transactions and other illegal activities, then the government may limit the use and sale of bitcoins through legislation.

However, as the years go by, governments have slowly embraced cryptocurrencies. In 2015, the New York State Department of Financial Services ordered companies who engaged in buying, selling, trading, or storing Bitcoin to keep track and record their customers’ identities, maintain capital reserves, and hire compliance officers. In addition, any finalised transaction of $10,000 or more in cryptocurrency must be registered and reported.

3. Fraud

Bitcoin offers private key encryption, which is high-level security for its users. This key can be used to verify coin owners and register transactions. Despite its existence, fraudsters and scammers also attack online banking transactions and attempt to sell fake bitcoins to users. In July 2013, the Securities and Exchange Commission (SEC) acted against a scammer that used a bitcoin-related Ponzi Scheme.

4. Market

It’s popularly known that the cryptocurrency market has a highly volatile nature, which means crypto coins can experience sharp increases and decreases in its market value like a roller coaster. As the market is subject to a high volume of buying and selling on exchanges, it possesses a high sensitivity to any newsworthy events. Research shows that Bitcoin’s price reached above $50,000, and experts from Citibank predict that it may hit $318,000 by the end of 2022. 

Due to the volatility of the market, trusted apps are highly encouraged. Risks must be taken seriously, so it’s important to look for trading platforms that have trustworthy staff ready to help beginners and experienced traders feel at ease and target the trading market with the right accuracy and timing.

5. Insurance

The majority of the trading investments are insured through the Securities and Investment Programs (SIP), while bank accounts are under Federal Deposit Insurance Corporation (FDIC). Since the crypto field is a developing industry, platforms and user accounts are not yet insured by any federal government program. Fortunately, FDIC is not interested in looking for ways to protect Bitcoin and the identity and funds of crypto users.

Conclusion

The cryptocurrency market may be profitable, but it sure does come with risks, mainly related to security and volatility. Remember that the crypto market involves spending real money, so be sure to research and understand what you’re getting into before you start to invest. As a heads up for your career, you will probably encounter the risks listed above; while these may be unavoidable, it’s vital to know what to do when facing them.

Previous Post Next Post