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The Dangers of Bitcoin

Investing

The Dangers of Bitcoin

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“Stay Away. Bitcoin is a mirage.” These are the words that were uttered by Warren Buffet, the Billionaire investor. You may find that there are as many Bitcoin sceptics as there are advocates for it. If you had invested in bitcoin at the beginning of the year you would approximately have received a return of 430%. These are PHENOMENAL RETURNS!!! One is tempted to close their eyes and buy Bitcoins without even thinking. But for one to consider Bitcoin as an investment option, it will be wise to consider the risks involved. 

The risks in Bitcoin

Beware of “Digital thieves” a.k.a hackers – Bitcoin exchanges have been notorious for being hacked. There is no guarantee that your Bitcoins will be safe from internet hackers. In 2014, MT Gox a Japanese Bitcoin exchange based in Japan filed for bankruptcy after losing about 850000 Bitcoins valued at around half a billion US Dollars. Last year, Forbes.com published an article about how hackers used phone numbers to steal Bitcoins. Another problem, with using Bitcoins is that the transactions are irreversible so there wasn’t a way for the stolen Bitcoins to be retrieved.

Beware of Bitcoin Volatility – There is no dull day when trading Bitcoin because the price never stays constant. The price of Bitcoin fluctuates a lot. Having days when the price of Bitcoins moves up or down by more than 5% is commonTraders enjoying having a lot of volatility but when one is trading Bitcoin one has to consider the chances of losing 5% of your capital in one day. Since Bitcoins inception, some of Bitcoin’s major crashes were on the 4th of December to the 7th of December 2013, where the value of Bitcoin fell by 39%. Similarly, in 2014 the price of Bitcoin fell by 71% from the February 4 to February 16. 

Beware of Irrational Exuberance Robert Shiller the author of “Irrational Exuberance”, defined Irrational exuberance as the psychological basis of a speculative bubbleHe further said that a speculative bubble ia situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.” 

Explained simply, the popularity of Bitcoin is rising and people are  beginning to see it as a get-rich-quick scheme. More and more people are beginning to speculate on the price of BitcoinSoon the price may not actually be driven by its real value but by FOMO (“Fear Of Missing Out). When people realise that its value is not equal to the price paid for it, prices will fall drastically and a lot of money can be lost.

Beware the lack of Regulation – Currently, there is no regulation that protects investors of Bitcoins.

Also, some countries fear that Bitcoin can be used for illegal activity and tax evasion because it is hard to trace and monitor. So there is a risk that Bitcoin can be banned from being used or countries may restrict its use.

Conclusion

In my personal opinion, I do believe Bitcoin is a brilliant idea. In the words of Bill Gates, Bitcoin is a technological tour de force.” Having said this, Bitcoin has its flaws and dangers which should be considered before using it.   

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Tinaye is a self taught forex trader. He holds an honours degree in mathematics and is currently pursuing a Financial Risk Management (FRM) qualification.

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