Bitcoin Risks Investors Need to Know
Risk one is the volatility of bitcoins
Everyone knows how volatile Bitcoin is, and those who invest in it will see a sharp fluctuation in the value of this cryptocurrency. If you can’t handle the ups and downs of bitcoin, investing in bitcoin is not for you. There is little to be gained if losing your capital causes you to lose sleep. I cannot stress enough the importance of using your discretionary money to play the cryptocurrency market.
What is discretionary spending?
This is money spent on travel, food, entertainment, hobbies and sports.
You would never spend rent money or money that has been set aside for your retirement on entertainment like spending 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 everyone who had bitcoins invested with cryptopia lost their money. There have been some sad stories of some individuals losing a lot of money.
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 should add is that the actual amount of money lost by crypto investors is likely to be greatly inflated due to the rise in the price of Bitcoin. If someone invested $1,000 in bitcoins and it grew to $10,000 in a few years, to lose the lot. It will be recorded that this person lost 10 thousand, when in reality he lost only 1 thousand.
Risk three – Lost passwords
An Australian man is locked out of his bitcoin wallet because he can’t even remember his password. The website where he stores his bitcoins will permanently lock him out of the wallet if he makes ten failed login attempts. He made eight. He has a bitcoin wallet of more than 300,000.
The lesson here is to write down your password and keep it under lock and key in a safe place.
Another tip is to diversify your portfolio so that if something goes wrong, you don’t lose too much at once.
Risk four – government control
Governments have the ability to ban crypto trading; China has done just that. Several agencies in China have joined forces to ban what they call “illegal” cryptocurrency activity. This doesn’t mean that other countries are following suit, but it just goes to show that governments do have the power to do so.
Risk five is taxation
Two things in life are certain: death and taxes. You can be sure that at some point the IRS will want a piece of your Bitcoin pie. Be it in the form of capital gains tax or an increase in the value of bitcoins. It’s worth remembering that if you’re subject to capital gains tax on your Bitcoin, you may be able to claim back tax on any capital losses. A good accountant will be able to advise you here.
Whatever form of capital gain you invest in, you must always remember that when there is an opportunity for capital gain, there is also the opportunity for capital loss. Investing in cryptocurrency is risky, so it cannot be stressed enough that the money you invest in Bitcoin should be money you can afford to lose.