The terms bubble and Bitcoin have virtually become synonymous in the minds of many cryptocurrency skeptics. Nearly every passing day, Bitcoin and other cryptocurrencies are making headlines with some experts calling them the new “gold.”
Because of the steady increase in Bitcoin prices, the majority of investors are looking for new and revolutionary approaches to generate high returns in today’s low investment-rate business environment. While the cryptocurrency has defied all the doomsday prophesies, there is still a number of ways this party may end badly for the swelling ranks of Bitcoin investors.
Opinion is still divided on whether Bitcoin represents a real investment or just a speculators game. Even Wall Street is divided, with many experts warning mainstream investors to stay away altogether or proceed with greater caution. According to Wall Street Journal, Goldman Sachs Inc. is considering jumping on the Bitcoin investment bandwagon.
Yet Jamie Dimon –the JPMorgan Chase CEO—doesn’t think so. At an investor conference held in New York in September 2017, he said that Bitcoin “won’t end well” predicting a blow up for the cryptocurrency.
If you are among the intuitive few who got into Bitcoin investment in its infancy, you most likely are a millionaire now. It isn’t too late to jump on the bandwagon, but that’s not to say there aren’t risks associated with it. In “What are the Risks of Holding Bitcoin?” we dive deeper to explore all the risks associated with Bitcoin crypto.
Perils of Bitcoin crypto
Here are some perils associated with holding Bitcoins:
#1: Bitcoin is extremely volatile
Investing in Bitcoin poses huge risks, as the prices have been awfully volatile. The majority of investors are skeptical about Bitcoin as an investment vehicle simply because there’s nothing for them to analyze. While price volatility in fiat currencies can easily be measured using the Volatility index or CBOE Volatility Index (VIX), Bitcoin and other cryptos still don’t have a generally accepted index because they are still in their nascent stages.
But we know Bitcoin is highly volatile in the form of 10 times changes in prices versus the fiat currencies within a relatively short time.
Generally, price fluctuations in Bitcoin as noted on the Bitcoin exchanges is driven by a couple of factors.
First, its adoption rate has always been fraught by the bad press which keeps on scaring potential investors. Second, Bitcoin’s perceived value keeps on fluctuating because its store of value properties that keep on changing as a result of changes in the core software. Third and finally, there is a lot of variance in perceptions of the crypto’s store of value and its method of value transfer.
#2: Regulatory challenges
Unlike other investment vehicles, Bitcoin and other cryptos are not regulated by central banks or government entities. As such, there is no organization that you can approach in case you want to seek for clarifications concerning the transactions. For instance, if you bought some goods using a credit card and got ripped off, you can call the bank or merchant and seek compensation, something that is impossible with Bitcoin.
Also, regulations are still considered a major risk when exploring the future prospects of Bitcoin. The price of the Bitcoin heavily relies on its market demand. For example, if a country such as China bans its citizens from Bitcoin trading, its prices will automatically crash. This is because China is by far the largest trading market for Bitcoin.
And this also applies for the leading Bitcoin startups such as the ones in the U.S. and U.K. Should any large economy prohibit Bitcoin in their jurisdictions, the price will automatically collapse take a lot of time to recover.
#3: Bitcoin scalability challenges
For some time, the Bitcoin community has been struggling to come to an agreement on how to deal with scalability challenges. For Bitcoin to succeed, its underlying blockchain needs to manage large transaction volumes within a shorter time than the ones it is currently processing.
At present, Bitcoin transactions take approximately 20 to 40 minutes to be validated on the blockchain. While this is fantastic when performing international funds transfer, it isn’t good if you were trying to pay for lunch at a restaurant. Ideas on how to scale up Bitcoin have continued to divide the Bitcoin community with miners and developers taking different positions.
For instance, SegWit2x (Segregated Witness) which was initially proposed as a means of relocating witness (transactions) inputs from the transaction hash to scale up the block size was abandoned at the last stage. By increasing the size of the blocks that are passed regularly from 1MB to 2MB, SegWit2x intended to scale up the network and improve the rate of transaction processing.
But this fork had the potential of splitting the Bitcoin crypto into 2 and that’s why it was abandoned. If no agreements are made, Bitcoin’s scalability risks may lead to Bitcoin grappling as a transactional currency in the long term.
#4: Large-scale hacks on Bitcoin firms
The potential of large Bitcoin firms and cryptocurrency exchanges incurring losses from cyber-attacks are a viable risk which has proven to have a negative impact on the Bitcoin price in the recent past. For instance, Bitcoin’s value fell close to slightly over 23% in 2014 as a result of Mt. Gox hack.
Another recent hack—Bitfinex hack—in 2016 resulted in Bitcoin’s price declining by over 20% from $607.37 to $480. Research conducted Hacked.com shows that about one-third of all the Bitcoin exchanges have been hacked since 2009 when Bitcoin was conceived. Despite the efforts to improve online security at Bitcoin startups and exchanges, the risks of large-scale hacks are still real and one that is most likely recur again in the future.
These high profile hacks have both short term and long term effects on the price of bitcoin and its long term price development.
#5: Bitcoin transactions are immutable and untraceable
The fact that Bitcoin transactions aren’t centralized means that they can’t be traced by any government authority. This has the effect of attracting hackers and criminals with sales and purchases of illegal drugs and other items flourishing. This, in turn, can invite governments and other regulatory authorities to spin into action, casting negative aspersions on Bitcoin as was the case with the Silk Road crackdown that occurred in 2013.
Wrapping it up
Bitcoin presents a diversity of investment prospects that didn’t exist prior to its development. Yet, it has failed to convert the investors concerned about its conceivable rate of adoption as an alternative investment vehicle. While millions of profits can be generated on Bitcoins, you must treat it as a speculative investment.