Bitcoin Risks Explained
You have surely heard about the wild price surges bitcoin has seen, and how some people made large gains and even became wealthy from it. But what you also need to know, dear reader, is that bitcoin’s risks are very real: many people have lost their money because of it. So before you ask how to get started with bitcoin, get to know its risks first — and that is what we will discuss today.
Bitcoin risks
The risks of digital currencies are not limited to losing money. In some countries that prohibit dealing in this kind of payment, they can go as far as imprisonment. Among the Arab countries, Algeria and Morocco have moved to issue laws that criminalize using them, there are penalties for bitcoin in Egypt, and there is likewise a penalty for bitcoin in Saudi Arabia.
Based on the above, bitcoin risks can be classified into:
- Legal risks
- Risks from price volatility
- Hacking risks
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As mentioned above, some Arab and African countries have moved to criminalize dealing in cryptocurrencies, treating them as a form of electronic fraud, while other countries have taken no action for or against dealing in bitcoin.
The basis for these laws probably goes back to bitcoin’s history, when it was the official currency on early dark-web sites, used by hackers and at times by drug and organ dealers. After you open a bitcoin account, no one will know who paid and who sent the money.
Penalty for bitcoin in Egypt
These countries’ wariness of bitcoin can also be traced to the huge amount of electricity used to produce small parts of it, which can cause problems for countries that are poor in electricity, such as Egypt. The power consumed by even a small number of bitcoin mining rigs can at times equal the consumption of entire residential areas.
On that basis, the penalty for bitcoin in Egypt does not concern trading it but rather producing it and the mining rigs used in production, which could expose the country to an electricity crisis if a number of those rigs are used.
Price volatility risks
Sharp swings in the price are one of the strongest reasons for caution when dealing with bitcoin. Imagine, dear reader, that you bought bitcoin at a price of $50,000, for example, and the price fell by 20% within a few minutes — how would you feel at that moment?
Of course, if you are speculating on bitcoin at that time, you will certainly lose a large part of your account, if not all of it (in the case of a small account, or not following risk management), or at least lose 20% of your capital if you are holding it in your own wallet.
Hacking risks
This factor may be the lowest in terms of risk, because of the high level of security in the blockchain system that bitcoin is built on. Still, we cannot deny that there are many incidents that have been recorded by government authorities.
In general, hacking remains a constant threat to investors, from the start of online dealing up to the present day, and it is natural that dealing in digital currencies is not free of it, even if by a tiny, almost negligible share.
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FAQ
What are the risks of bitcoin?
Bitcoin and other cryptocurrencies have historically been highly volatile, and the swings can lead to large losses if sold at the wrong time, or if bitcoin is subject to future regulation, fraud, cybercrime, theft, or loss.
Is bitcoin high risk?
Bitcoin is highly volatile and high risk, and it is certainly not a good idea to invest all your savings in the digital currency. If you are prepared to take on the risk, first make sure you understand what you are investing in and have a clear, well-studied investment strategy.
Is investing in bitcoin worth the risk?
In short, bitcoin can be an investment suited to people who tolerate high risk; even so, do not invest all your savings or profits in this digital asset.
Why is bitcoin considered a risky asset?
While bitcoin’s characteristics make it a low-risk asset in the eyes of its supporters, investors see it as a risky asset because of its volatility and its sharp, uneven price rises. When investors want to reduce risk, they sell stocks alongside bitcoin, so it counts as a risky asset.
How can I avoid the risks of investing in bitcoin?
There are five ways to manage risk when trading bitcoin:
- Protect yourself from volatility risk with a solid strategy.
- Put the quality of the trade ahead of the amount of profit.
- Make sure you have an emergency exit strategy.
- Do not use high leverage.
- Avoid rumors, hearsay, and false news.
Disclaimer: This article is for educational purposes only and is not investment advice. Cryptocurrencies such as bitcoin are highly volatile and can lose value quickly; trading CFDs with leverage carries a high risk of losing money rapidly, and you could lose more than your initial deposit. Never invest money you cannot afford to lose, and consider seeking advice from a licensed financial adviser before making any decision. Some links on this page are affiliate links: if you open an account through them we may earn a commission at no extra cost to you.
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