Bitcoin: Know about it so you can love it too (Part 3)

Challenge entry: Bitcoin - the risks involved

---

---

Having previously talked about transparency, anonymity, credibility, security, decentralization and halving in Bitcoin in the first two parts of this short series, I'll be talking about the risks involved in using bitcoin in this third part of this short series.

There are a lot of crypto enthusiasts in the world today who would agree that digital currency is the future. Many of them, if not all, also agree that bitcoin is a market leader when it comes to digital currency. Indeed, bitcoin has been top among the cryptocurrencies since it's inception and with it's recent bull run, has also attracted more users who now think to invest in bitcoin.

It is however imperative for all lovers and/or users of bitcoin both old and new, to know that bitcoin in any of it's guises is not allergic to risks. From the markets to regulations and taxes, there is a significant quanta of risks involved in the usage of bitcoin. My advice? Take time to consider the information you're about to get so you don't pick up the same lamentation as this guy

_Source

---

Investment risks

---

Bitcoin as we know it was originally designed to be a currency or medium of exchange. There was no equity investment when it was designed but after its appreciation in value, some speculative investors began to cast their eyes in bitcoin's direction. However, there is no guaranteed price for bitcoin and that has brought about inherent risks. Sometimes it's bullish, sometimes it's bear. Now this is why you should care, bitcoin's track record of credibility is not so long given that it has only been around for about 12 years. Though it has show some promising signs, it's still developing and as such, carries inherent investment risks.

---

Regulatory risks

---

There are a lot of downsides in the use of bitcoin and these does not even include the fact that bitcoin rivals government issued currencies. In the past, bitcoin has been used for money laundering, black market transactions and for sponsoring terrorists. This has alerted various governments in the world to the illegal potentials in using bitcoins. The result? Bans and regulations. The map below tells a familiar story.

^{The status of bitcoin's regulation around the world}

_Source

Only the US, Canada, Australia and a few other countries legalized and encouraged the use of bitcoin. The rest has either banned it or merely tolerated it. Even in countries like the US where it is legalized, some states, aware of the inherent threat in the use of bitcoins have introduced some regulations. Take New York for instance

in 2015, the New York State Department of Financial Services finalized regulations that would require companies dealing with the buy, sell, transfer or storage of bitcoins to record the identity of customers, have a compliance officer and maintain capital reserves. The transactions worth $10,000 or more will have to be recorded and reported._Source

Thus, there's a risk in using bitcoins caused by government regulations. Imagine acquiring bitcoin and not being able to use it as you would want to because of what the government where you are says about bitcoin. That's the problem bitcoin faces when you pan at government regulations.

It is however expected that governments will find other ways to deal with the misuse of bitcoins for criminal transactions other than banning it. There has already bee success stories of governments de-anonymizing cyber criminals using bitcoin. Expect the number of such stories to increase in the future but also be aware of the regulatory risks bitcoin faces till then.

---

Security risks

---

Oh yes. There's a very significant security risk in using bitcoin. It's not actually from the blockchain, it's from somewhere else.

Most of the people who hold bitcoin didn't mine them. The acquired them from the miners or from someone who acquired from the miners. As a statement of fact, bitcoins come from the miners who decided to sell theirs. Now, this selling and buying of bitcoins is done in special online markets called bitcoin exchanges. These exchanges also store these bitcoins and are fully digital making them susceptible to attacks from hackers and malware as well as suffer from operational glitches. Same goes for online wallets. One notorious hacking incident happened in 2014 when Mt. Gox a bitcoin exchange in japan shut down after millions of dollars worth of bitcoin were stolen from accounts on the exchange.

So, if you use bitcoin and you store it in an online wallet or exchange, you know what's involved. A solution to this is to store your bitcoins in paper wallets. This means printing out your bitcoin private keys and address rather than having them on a computer. Another way is to keep bitcoins in a computer not connected to the internet. My advice? Paper wallets. Which ever you choose to use though, the safety of the stored bitcoins largely depends on the user.

---

Insurance Risks

---

Normal bank accounts are insured in various countries. In the US, bank accounts are insured through the Federal Deposit Insurance Corporation (FDIC) up to a certain amount. In my country Nigeria, bank accounts are insured by the Nigeria Deposit Insurance Corporation (NDIC) for amounts up to ₦500,000 (about $1,314.33 currently). There is no such provision made for bitcoin. This means that if there is any mishap with someone's account and bitcoins gets missing, the person bears the loss A HUNDRED PERCENT. So while you're rest assured of the saftey of your money after depositng in the bank, the reverse is the case with your bitcoins. We hope this changes in future but for now, you have to take full responsibility of your coins and secure them.

---

Market risks

---

In the market, bitcoin has been a victim of a lot of wars. The price has shot up and slumped down rather instantly on some occasions. This has been due to the tussle between market forces. The ammunition? NEWS. The scenario depicts a risky market for bitcoins as one can't tell with reasonable certainty the best time to buy or the best time to sell. So are you in the market for bitcoin or do you want to sell? be aware of the risks and make sure you have lots of valid ammunition (I meant to say information).

---

Conclusion

---

Yes bitcoin is risky but not with valid safety options or precautions. Perhaps, the most threats comes from regulations and the markets where the user has no say. Sometimes it's not possible to use bitcoin but we believe it won't be like that forever. If you're free or at least allowed to use bitcoins, then you'll love it as long you maintain a high level of security and you arm yourself when going to the markets.

---

Thanks for reading. Let me in on your thoughts in the comments section.

---

References

1. Investopedia.com
2. New York State Department of Financial Services. "Virtual Currency Businesses." Accessed July 25, 2020.