Interest in digital currencies has increased as major companies such as Tesla, for example, have invested in Bitcoin. Cryptocurrencies have been a hot topic for a while now in the financial world, but the economic uncertainty that came along with the coronavirus pandemic has turned the Bitcoin hype into high alert.
While some investors may continue to profit, others, especially those who get into the tops, stand a good chance of losing everything.
Here are the biggest risks of investing in Bitcoin and cryptocurrencies in general.
- Fluctuation and volatility
The price of Bitcoin and cryptocurrencies in general is incredibly volatile as it is such a young market. It is not uncommon for the price of Bitcoin to fluctuate sharply within a day or even within minutes. This makes trading a dangerous venture. The fundamentals usually support the currencies in general. But Bitcoin is not a fully functional currency, and its fundamentals are still emerging and evolving. As a long-term investment, it pays to look at the previous all-time high.
In December 2017 when Bitcoin hit the $20,000 level, this might sound tempting because Bitcoin is currently regularly trading at more than $50,000, but when you look at it a short time later, in February 2018, the price dropped to less than $7,000. This sharp drop could easily happen again.
- Bitcoin is self-supporting
Another reason Bitcoin is risky is that it is a tradable asset but is not backed by anything but its mathematical algorithm. Bitcoin only has value because the people who trade it say it has value. There are no governments or regulatory agencies that help bitcoin retain its value. The value is basically made up, for lack of a better option. In other words, as investor Warren Buffett said, Bitcoin has no unique value at all. This makes it an incredibly risky investment if the market decides it is no longer worth it.
- Bitcoin is not as disaster proof as people think
One of the biggest arguments for investing in Bitcoin during and after the pandemic is that it is a great hedge against inflation for fiat currencies, national banks or even the entire financial system, should they fail. The pandemic has made these scenarios seem more plausible than ever, but thinking that Bitcoin will be your salvation in these situations is probably wrong.
If traditional currencies or traditional financial systems fail at all, governments and central banks will respond by keeping tangible assets like gold in vaults as an alternative, not cryptocurrencies like Bitcoin, although that is likely to change in the future with no guarantees of course.
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