The risks of bitcoin

Bitcoin risks that investors need to be aware of

Risk one – the volatility of bitcoin

Everyone knows how volatile bitcoin is and those who invest in it will see the value of this cryptocurrency fluctuate 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 spending money to play the cryptocurrency market.

What is discretionary spending?

This is money that is spent on travel, food, entertainment, hobbies and sports.

You would never spend your rent money or the money you set aside for your retirement on a party like a day at the races, 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 all those with bitcoin invested in cryptopium lost their money. There have been 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.

Another thing I have to 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 invested $1,000 in bitcoin and it grew to $10,000 in a few years only to lose a lot. It will be recorded that this person lost 10k when in fact they only lost 1k.

Risk three – lost passwords

An Australian man has been denied access to his bitcoin wallet because he can’t even remember his password. The website where he has his bitcoin will permanently lock him out of the wallet if he fails to log in ten times. He made eight of them. He has over 300 thousand in his bitcoin wallet.

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

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

Risk four – State controls

Governments have the ability to ban crypto trading; China has done just that. Several agencies in China have joined forces to ban what they describe as “illegal” cryptocurrency activity. That doesn’t mean other countries will follow suit, but it just illustrates the 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 the IRS will want a piece of your bitcoin pie at some point. Whether it’s in the form of capital gains tax or the increased value of bitcoin. It should be noted that if you are taxed on your bitcoin capital gains then it is possible to claim tax back on any capital losses. A good accountant will be able to advise you here.

Whatever form of capital gain you invest in, you should always keep in mind that when there is an opportunity for capital gain, there is also a possibility of capital loss. Investing in cryptocurrencies is risky, so it cannot be stressed enough that the money you invest in bitcoin must be money you can afford to lose.