No matter where you are on Bitcoin, we can agree on one thing: It’s polarizing. Some investors believe this is the way forward, others consider it a scam.
However, it is gaining popularity. It is likely that the coronavirus pandemic accelerated its adoption by engaging more online retailers. More than a third of small and medium-sized businesses will now use Bitcoin as a means of payment.
And even bigger companies like Microsoft are starting to accept this. Bitcoin fans also see it as a protection against inflation. And with the Federal Reserve printing money left and right, some get nervous about the future of the dollar.
You may be wondering: should I jump on the Bitcoin train or run in the opposite direction? Here are four risks to consider before taking the plunge:
Bitcoin is one of the most volatile investments you can make
Bitcoin is going through incredible spikes and losses in value. As early as July 2010, a year after Bitcoin was released, a Bitcoin was only worth eight cents.
The value soared everywhere until it really made waves in 2017. A bitcoin hit $ 1,000 early, then zoomed to $ 5,000 in October and doubled to $ 10,000 in November.
By mid-December, one bitcoin was worth nearly $ 20,000. The bubble eventually burst and the value fell to around $ 3,500 by November 2018.
However, the value of Bitcoin skyrocketed again in 2020. Just a few weeks ago, the value of a Bitcoin had reached an all-time high of just under 42,000 US dollars, but then rose to 34,863 US dollars within 24 hours.
Will it continue to gain in value? We do not know it. The reality, however, is that volatility is always risk. And risk isn’t a bad thing, but you need to be aware of what it could end up costing.
Bitcoin is having some kind of identity crisis
Does Bitcoin have more in common with the US dollar or with gold? The answer is both.
While Bitcoin is a currency, Uncle Sam has a different mindset. The Commodity Futures Trading Commission considers Bitcoin a commodity (like gold), while the IRS treats it as property, which means – you guessed it – they can tax it.
We have to keep in mind that Bitcoin is still the new kid on the block. While this has been around for over 10 years, we still don’t have proven best practices for building wealth with Bitcoin.
Bitcoin is not regulated by any central bank or nation
Bitcoin has been a mystery since its release in 2009. It works without the supervision of a bank or a nation-state, which means that it is exchanged peer-to-peer.
It’s like the wild west of currencies – there is no marshal to keep the law. For some, this is an attractive feature. Others recognize the risk that comes with zero regulation.
Bitcoin is widely used for illegal activities
Since all bitcoin trading is anonymous, the cryptocurrency scene is a hot spot for cybercrime.
All sorts of shady things, from extortion to phishing, Ponzi schemes to doing business on the dark internet, happen with Bitcoin.
Of course, there are a lot of aspiring people who use cryptocurrencies as well. But hackers, who know a lot more about coding and software than the average Joe, can use that knowledge to their advantage. So be careful.
As you’ve probably guessed, I’m not a fan of Bitcoin. I would much rather see your hard earned money invested in proven wealth building methods, such as tax-privileged retirement accounts and growth stock mutual funds.
However, if you want to learn more about Bitcoin, check out our full blog post on the subject.
The most important thing is that you are aware of your financial decisions, informed and under control at all times!