The Risks of Bitcoin

Investors should be aware of the risks associated with Bitcoin.

One risk is bitcoin's volatility.

Everyone is aware of how volatile bitcoin is, and those who invest in it will witness its value vary considerably. Investing in bitcoin is not for you unless you can handle the ups and downs of the currency. There's no point in investing if you're going to lose sleep over the loss of your money. I cannot emphasize enough how critical it is to invest your discretionary spending money in the Bitcoin market.

What is a discretionary expenditure, and how does it differ from other types of spending?

Travel, dining out, entertainment, hobbies, and sports are all examples of how money is spent.

You would never spend your rent money or money set aside for retirement on entertainment such as a day at the races, so why would you use that money to gamble on the bitcoin market?

Hacking is risk number two.

A business called "Cryptopia, an online bitcoin trading platform handled funds invested in the cryptocurrency. It was hacked, and everybody who had invested bitcoin with crypto lost their money. There were several heartbreaking instances of people losing enormous sums of money.

It goes without saying that you should never gamble with money you can't afford to lose, or put all your eggs in one basket, as many of these investors appear to have done.

Another point I'd like to make is that due to the rising price of bitcoin, the actual amount of money lost by cryptocurrency investors is likely to be greatly exaggerated. If someone put $1,000 in bitcoin and it rose to $10,000 in a few years, only to lose it all, they would be considered a success. It will be recorded that this person lost $10,000 while in reality, they only lost $1,000.

Three threats exist lost passwords, phishing, and identity theft.

Because he can't remember his password, an Australian guy is locked out of his bitcoin wallet. If he makes ten failed login attempts, the website where he keeps his bitcoin will lock him out of his wallet permanently. He's made eight so far. In his bitcoin wallet, he has almost $300,000.

The takeaway here is to write down your password and keep it in a secure location.

The third piece of advice is to diversify your portfolio so that you don't lose too much money all at once if things go horribly wrong.

Controls by the government, risk number four

Governments have the power to prohibit cryptocurrency trade, and China has done so. Several Chinese government entities have banded together to outlaw what they refer to as "Cryptocurrency activity that is deemed 'illegal.' This is not to argue that other countries will follow suit; rather, it demonstrates that governments do have the authority to do so.

Taxation is the fifth risk.

Only two things are certain in life: death and taxes. You can bet that the IRS will want a slice of your bitcoin pie at some point. Whether it's in the form of a Capital Gains Tax or a rise in bitcoin's worth. It's worth noting that if you're paying taxes on your bitcoin's capital gains, you might be able to receive a refund on any capital losses. A qualified accountant will be able to help you out with this.

Whatever form of capital gains you choose to invest in, keep in mind that with the potential for capital gains comes the potential for financial loss. Because investing in cryptocurrency is dangerous, it cannot be overstated that the funds you invest in bitcoin must be funds you can afford to lose.