risks of bitcoin

What are the risks of Bitcoin?

Charles
Charles

Learn about the risks of Bitcoin

A lot like buying and trading in commodities or government-issued currencies, risks of Bitcoin – a type of cryptocurrency – is never a risk-free endeavor. Bitcoin has a volatile price that can make it a bigger risk than traditional stocks and other kinds of investments. However, that volatility can also make it more profitable too. Which makes it very tempting if you’re hoping to make big money through investing. Bitcoin is an emerging technology and the knowledge that you will need to safely purchase and store your Bitcoin can add to the risk involved. 

Check out the best guide to buying Bitcoin

In the early days of Bitcoin was often hit by hacks and fraud. As the technology gradually becomes more regulated over time and more widely accepted by global financial institutions, it has begun to gain a bigger degree of legitimacy. As the technology Bitcoin begins to gain more acceptance, there are new ways being developed to buy, sell, and store Bitcoin. Many have made it a simpler, more convenient, and more secure method of investment. 

If you want to buy Bitcoin using an e-Transfer but have some worries about the security or investment risk, then read on to learn more about it. 

What Are The Risks Associated With Bitcoin?

There are three main risks that are associated with buying and owning bitcoins. 

  • Bitcoin’s value could drop after you buy your bitcoins.
  • Someone could get access to your private key and steal your bitcoins. 
  • You could lose the private key that allows you to gain access to your bitcoins. 

The first risk is the same risk that comes with making any sort of investment, whether more traditional or bitcoin. Whether you choose to buy stocks, bonds, mutual funds, indexes or lend money, there’s always a possibility that the value of your investment will fall or the other person won’t pay you back. You could even lose your whole investment if you’re very unlucky. 



Can you handle the volatility risks of bitcoin?

Bitcoin is a volatile investment, which means that the price can rapidly move up or down. If you buy Bitcoin now and sell it later on when the value is higher, then you could stand to make a large profit. Throughout 2020, Bitcoin dropped to a low value of around $3,800. But closed out the year with a value of nearly $30,000. This clearly shows there is a real opportunity for profit for investors who make smart choices. Over the last few years, people have made big investments in Bitcoin and then seen the price drop from nearly $20,000 per bitcoin to less than $3,500 per bitcoin over a short time. This is a drop of over 80%. If you want to get into Bitcoin, you should keep the possibility of this risk in mind and make sure you can handle it. 

There other possible risks associated with your private key. You will never technically physically possess your bitcoins. Bitcoin is a digital-only currency. However, the private key is what gives you the ability to spend or transfer your bitcoins, and gives you ownership over the bitcoins associated with that key. 



Keep your bitcoin safe!

If someone manages to crack or get your private key, they will be able to transfer your bitcoins into their own digital wallet, and you may not be able to get your money back.

There are some people who instead choose to store their private keys on their own rather than using an online wallet. You could do this by writing your key down, or storing it on a device like a thumb drive. This is a safe choice, especially if the storage device you use isn’t connected to the internet. However, there is a risk you will lose your private key. There have been some horror stories of bitcoin investors losing tens of millions of dollars worth of bitcoin after losing or throwing away keys. Or putting a drive with a key on through the washing machine and ruining it.


   

How To Keep Your Bitcoins Safe

The best way to keep your bitcoins as secure as you can is to keep your private key stored on a device or app. One that is not connected to the internet, or in a non-digital form, such as written down. This is called a cold wallet.

Choose to use a physical cold wallet, like a thumb drive. This could be kept in a fireproof safe or other secure location. A safe deposit box at a bank could be another safe option for storage. You could also add an extra layer of security to your cold wallet by encrypting the device. 

If you have your private key written down, change a few digits so nobody else can make use of it. For example, you could change the first number from an 8 to a 6, and remember this change, or leave yourself a hint to help you remember it. 

Keep your bitcoins in a cold storage wallet

Some people who trade bitcoin like to keep their bitcoins in an online digital wallet. Especially if they often buy and sell or need to have easy access to their digital wallet from several different devices. Many online cryptocurrency platforms or exchanges will set up a wallet for you when you open your account. 

Some platforms keep a lot of the bitcoins in their system in cold storage, which is offline. Others will only keep a small amount in online, or hot, storage for their users. In the same way that a local branch of your bank doesn’t have enough cash to cover all its customer’s deposits in its vault. Neither does a bitcoin platform. This means that if a hack was to happen, it won’t always put bitcoins belonging to all the platform’s users at risk. 

Risks of bitcoin are similar to any investment

Beyond where you decide to store your wallet, the largest risk is the humans who trade in bitcoin. Cryptocurrency scams are becoming more frequent in recent years. Fraudsters could try to convince you to share your private key or account details with them. They could also attempt to persuade you to install software that then infects your devices. And can steal your account information.

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Charles
  • Currently located in China, teaching English and working towards Financial Freedom. I write about money, travel, personal development and more!

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