Bitcoin: Know the risks before you buy

Even though Bitcoin hit a record high of about $19,200 for each coin on December 17, the cofounder of the Bitcoin.com website said that "Bitcoin is right now the riskiest investment you can make ... as soon as people realise how it works, they will start to sell".

Here are some of the things you should consider before you jump on the bandwagon.

How safe an investment is Bitcoin?
Investing in Bitcoin would mean investing in the complex algorithms on which it is based, and on the future of the peer-to-peer network that operates it.

Price volatility. The value of cryptocurrencies may change significantly even in a single day, which would mean a capital loss of your investment.

For example, last week the price of Bitcoin fell by 26 percent. If you had bought a Bitcoin on December 19, you would have paid $18,936 for each coin. But if you wanted to sell it on December 23, buyers on the market were not willing to pay more than $14,048 - a loss of $4,888 for each coin.

In 2013, the price of Bitcoins had fallen by 61 percent in a single day. On April 10 the exchange for Bitcoin had fallen from $266 to $140 for each coin.

Cryptocurrencies lack the historical track record of other currencies or commodities, such as gold, that could guide whether current levels of volatility are typical or atypical.

Hacking risk. On December 19, a South Korean cryptocurrency exchange said it would file for bankruptcy after it was hacked for the second time this year.

Over 70 million dollars' worth of Bitcoins has reportedly been lost by several cryptocurrency exchanges and miners, highlighting concerns about the security of such currencies.

"Hard fork" splits. Since the value and support for the currency depend entirely on the community using it, disagreement between the stakeholders may result in the splitting of the network to support new competing cryptocurrencies, known as "hard fork".

For example, Bitcoin Cash (BTC) is a hard fork from the original Bitcoin. Effectively, BTC is now a different cryptocurrency from the original Bitcoin, prompting stakeholders to sell their "old" Bitcoins and invest in this new one.

The cofounder of the Bitcoin.com website, Emil Oldenburg, reportedly "sold all my Bitcoins recently and switched to Bitcoin cash".

Early stage technology. With advances in technology, cryptocurrencies are likely to undergo significant changes in the future. How the existing cryptocurrencies will cope, or benefit, from those changes is to be determined.

There is also the risk of alternative technologies that could supersede existing cryptocurrencies and make them obsolete.

Where you can use it
Online stores that accept Bitcoin. In 2014, Overstock became the first major online retailer to accept Bitcoin payments. Monoprix and Newegg also accept Bitcoin online payments.

For travel. Latvian airlines AirBaltic and Air Lituanica accept Bitcoin payments for some of their flights.

California-based online travel booking website CheapAir.com claims to have completed more than $1.5m in Bitcoin sales on flights, hotel bookings and Amtrak railway bookings.