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What Are the Current Risks of Investing in Bitcoin?
Bitcoin's popularity has surged rapidly over recent years. Here are the current risks of investing in this virtual currency.
A digital, open-source protocol platform, called the Bitcoin network, issues and transmits Bitcoins. And this online peer-to-peer network comprises a digital ledger or the blockchain that all users' software stores wholly or partly. The blockchain records every Bitcoin transaction, time-stamps it, and displays it publicly, creating a verifiable history of all Bitcoin transactions.
The underlying technology has made Bitcoin a highly popular cryptocurrency. Today, many people are discussing Bitcoin as an investment online and offline. Also, investors and traders purchase this virtual asset on digital platforms using fiat money. But Bitcoin is not the only cryptocurrency the world has today. Ethereum is another virtual currency that follows Bitcoin in popularity. People can also purchase and sell Ethereum on crypto exchanges like the 1k daily profit. Nevertheless, Bitcoin remains the most prominent cryptocurrency.
Consequently, many people want to invest in this digital asset. But like with most investments, many people want to know the current risks of investing in this virtual currency. Here are the dangers of investing in Bitcoin.
Bitcoin is Not a Practical Exchange Medium from the Resources Standpoint
Bitcoin has a limited supply. Moreover, miners use high-powered computers to crunch algorithms to generate new tokens. The Bitcoin mining process requires a lot of computing power, with cryptocurrency mining consuming about 0.6% of the global electricity. Ideally, cryptocurrency mining uses more than Argentina's power consumption.
Bitcoin becomes a profitable asset for speculators that may install high-powered computers to venture into mining operations as the price soars. But the further increase will also increase electricity consumption. Since most Bitcoin mining activities happen in places whose electricity production is coal-based, the cryptocurrency will generate more carbon dioxide emissions. And this will raise more concerns among environmentalists.
Bitcoin Doesn't Always Hedge Against Equity Risk
Many Bitcoin enthusiasts assert that Bitcoin provides downside protection from the declining equity markets. And this has happened in some cases. However, Bitcoin is not always an effective hedge, as happened during the March and February 2020 bear market.
At this time, the value fell sharply before a rebound and a huge run-up. Thus, whether Bitcoin is a hedge or not remains an open debate. Therefore, every investor should exercise caution and monitor Bitcoin's performance in different market environments.
Governments Could Interfere with Bitcoin's Performance
Some Bitcoin enthusiasts believe that the cryptocurrency will eventually replace traditional currencies. That means if governments allow Bitcoin to increase, it may reduce their ability to set monetary policies. What's more, central banks won't tax wealth and earnings if Bitcoin flourishes.
For this reason, some governments, like South Korea, have introduced legislation for regulating Bitcoin and other digital currencies. The goal is to curb illegal activities like money laundering. China has also cracked down on this digital currency. Other countries could also follow suit if they realize that cryptocurrency will limit their control over monetary policies.
Bitcoin Doesn't Serve as Stable Value Storage
Many people want to invest in Bitcoin, thinking it is a good value storage tool. However, Bitcoin hasn't always proven its effectiveness in storing value. In some cases, investors have lost access to money held in this cryptocurrency by forgetting or misplacing private wallet keys. Since no central authority controls Bitcoin, investors and traders don't have an entity to contact requesting assistance to recover their funds.
The Bottom Line
Bitcoin has limitations that investors should understand before putting money into this digital asset. Conventional currencies like the U.S dollar pay investors some interest for holding them. However, this doesn't always happen with Bitcoin investments because a person could lose the earned interest if the cryptocurrency loses value. Thus, investors should understand how to lose money while investing in this digital asset.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes