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Why Investing in Bitcoins Will Not Work for Everyone
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Bitcoin is the talk of the town. With so much hype behind it, you may be wondering if you should jump on the bandwagon, and invest in the virtual currency. The cryptocurrency was created anonymously in 2008. Since then, its price has experienced dizzying fluctuations. It is considered too volatile for the average investor.
However, the cryptocurrency is popular with people who live internationally. Japan has made bitcoin to be legal tender. The Venezuelans use it to overcome cash shortages at home. It is also attractive to the Chinese because it provides a way of getting cash to use abroad. These three countries are the main drivers of the recent surge in the price of the bitcoin.
Investing in bitcoins may not work for everyone
Bitcoin is a virtual currency with no banks or intermediaries. It is a digital payment system that was created by an anonymous person or group of programmers and launched as open-source software back in 2009. Many financial experts believe that the technology that underpins it, mainly the blockchain, has the potential to create long term impact as a medium of exchange.
There are several reasons why an investor must be wary of investing in bitcoins.
1. It’s an anonymous digital payment system
The good faith of any entity does not control the cryptocurrency or backed by any government. Its value is what people perceive its worth to be. Anonymity is bitcoin’s main attraction. However, transactions records remain within blockchains.
This anonymity opens it to abuse by antisocial elements, including criminals and terrorists. It has supported fraud, theft, and other forms of crime. Proof that the virtual currency is used to fund illegal activities can lead governments to crack down on it. Also, this can lead to global regulations which will restrict its trading, resulting in a plunge in its price.
2. Security concerns
One of the main concerns about bitcoin is its present and future security. An attack on the network that manages the bitcoin can wreak havoc. The virtual currency operates through a decentralized network to prevent fraudulent activities or cyber-attacks. The interface is decentralized as many miners run it.
Miners are the individuals or businesses that maintain the system and operate the computers behind the cryptocurrency. They earn through transaction fees and block rewards. Currently, block rewards account for all the income. However, with time, the block rewards will fall in value.
It means that the transaction fees must increase failure to which the miners will stop earning and quit. This will result in the centralization of the currency and make it more open to a cyber attack. Also, it leaves it vulnerable to manipulation by an individual or group of profiteers who control a significant percentage of the currency.
3. Lack of reasonable ways to invest in the currency
The virtual currency is not traded on major exchanges and can’t be acquired or sold through a brokerage. An investor has to set up a wallet, a sort of a bank account only used for bitcoins. The investor can then connect to a conventional bank account, and use the ordinary currency to purchase or sell the bitcoin.
However, the process is cumbersome, which makes the currency less liquid than common equities. It also increases the currency’s wild swings and contributes to its volatility. So, this unique process of trading in bitcoin makes it illiquid. Furthermore, the method also leads to an increase in the rates of theft and fraud through the unsecured bitcoin exchanges.
4. Most investors have no clue what it is
The most crucial point to note is that a lot of people don’t understand the bitcoin. They may have an idea that bitcoin is a virtual currency, but they fail to see the broader picture of its revolutionary monetary theory. They also don’t understand that its proponents are seeking new means to secure data and currency transmission.
So if most investors have little or no knowledge of the risks or concepts involved, there is a considerable risk of collapse. Many people will be looking to use bitcoin to take personal loans. They may expect that investing in the virtual currency will enable them to access loans. However, to get a short term loan, the borrower must go a trustworthy lender.
Bitcoin is considered too volatile for the average investor. The unique process of trading in bitcoin makes it illiquid. It has also led to a large number of incidents involving theft and fraud through uninsured exchanges.
If then, you decide to join the action and invest in bitcoins, make it a small portion of a diversified portfolio, something you can afford to lose.
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