Bitcoin continues to make its early adopters rich but how much of a risk is making an investment today? There are all kinds of factors to consider. Will governments try to ban it? Can governments successfully ban it? Will quantum computing or another cryptocurrency render the Bitcoin technology obsolete? Of course, then there’s risks inherent with any investment. Do you look after it yourself, or trust a third party to do it for you? If you opt for the former, how is the best method to secure it? The following article addresses these concerns and aims to give those yet to get started in the world of cryptocurrency some points to consider before they buy their first Bitcoin (or fraction of one – as the case may be).
For those unaware, Bitcoin is a peer-to-peer, decentralised currency. It’s scare and therefore has a value attached to it. Bitcoin can be used to buy things over the internet, or in person. Many websites accept it, as do other services such as casinos. It might seem a bit alien using it for payments at first. However, it’s simple. For example, the process of making a transaction or deposit with Bitcoin is explained at NoDepositFriend.
Reasons behind Bitcoin’s growth
There’s no denying Bitcoin’s meteoric growth since it was first introduced to the world by the mysterious Satoshi Nakamoto in 2009. Starting life as an experiment in cryptography and decentralised consensus systems, certain network rules began to appeal to investors as Bitcoin began to slowly emerge from the shadows of cypher punk and libertarian circles. The chief of these is its absolute maximum supply of 21 million coins. With a fixed supply, one of the two variables determining price cannot be adjusted. For those who discovered Bitcoin early, this presented a unique proposition – digital scarcity. Like gold, ivory, and many other scare commodities on the planet, any increase in demand for Bitcoin would automatically create an increase in the price per Bitcoin. For those earliest investors, this was a very desirable attribute indeed.
As time passed, and the ecosystem matured, Bitcoin’s use cases improved. Many began to see its immutability as its main value proposition. For the rules to be changed in anyway would require immense capital investment and once the necessary hardware had been obtained, thanks to the incentive structure, it would be more profitable to just mine Bitcoin and play by the network rules.
Over time, Bitcoin has proved itself to be immensely resilient to both attack and alteration. This has led many around the world to see it as a permission-less store of value. There are no barriers to entry. All a person needs to use Bitcoin is access to some and an internet connection to transfer or receive coins. The lack of entry barriers provides a second important use case that gives Bitcoin value too. This is that citizens in places such as Venezuela and Zimbabwe can use cryptocurrency to “escape” from their own ravaged economies. Hyperinflation and currency devaluation has caused millions across the globe to lose practically everything they’ve worked their whole lives for. Remember those pictures in history textbooks of the men with wheelbarrows full of money in post-WWI Germany? That still happens in parts of the world today. Bitcoin can provide a safe-haven to store value in whilst the proverbial hits the fan in economies across the world.
It’s reasons such as these, plus a lot of “get rich quick” speculation that has caused the mass scramble to buy Bitcoin in 2017. It sounds too good to be true, right? Well, it still might be yet…
Risk Factors for Bitcoin Investors
The governments of the world, even those lovely, pseudo-democratic ones that let their citizens choose between “Elitist Party Red” and “Elitist Party Blue”, command a lot of power thanks to their control of national currencies through central banking. Bitcoin represents an immense challenge to this. For the powers that be, the thought of permission-less, global banking is a scary one. How would a government profit from the printing of their own currency? Worse still, how would central banks be able to take gambles with citizens’ livelihoods capable of crashing entire economies and still pay their senior members immense bonuses? If Bitcoin achieved the kind of global adoption that some proponents desire, the answer is simply: they wouldn’t.
This naturally scares governments, particularly those who are used to exerting immense control over their citizens. We’ve already seen China take steps towards regulating cryptocurrencies this year, and some nations have attempted to ban Bitcoin entirely. Such legislative steps have often had an impact of the Bitcoin price and certainly will have rattled a few investors in the process. For now, regulations that have been enforced have only hurt the price briefly. A global initiative against Bitcoin, or a terrorist atrocity that was funded by it, on the other hand, could create sufficient ill-feeling to considerably damage the investments of many.
Interestingly, however, there seems to be very little that governments could do to stamp out Bitcoin in the long term. If there was, they would have probably already attempted to do so by now. The only options available are extreme to say the least. They could try to ban all CPU and GPU processors, or to switch off the internet entirely. However, draconian measures such as these would likely result in social upheaval the likes of which the earth has never seen.
Another risk that Bitcoin investors face is posed by quantum computing. There are many who believe that the immense power of the quantum machines currently under development could make brute force hacking private keys simple and effective. If this were possible, not a single wallet on the planet would be safe. Naturally, investors would attempt to sell en masse with hopes to retain whatever value they could. This would quickly result in a Bitcoin price of single digits or even zero overnight. For now, however, quantum computing does not pose a significant risk to investors. What’s more, the network of developers working solidly to improve the Bitcoin protocol have this threat on their radar and will attempt to circumvent it before it ever materialises.
Replaced by another tech
Another technological factor that poses a risk to investors is that Bitcoin could eventually be replaced with a better technology. There are already competitors in the space that offer slightly different functionalities. Take Monero, for example. This privacy-based crypto-coin allows for completely anonymous transactions and would likely be favoured by users for certain applications. Clamp downs on Bitcoin could cause this userbase to grow, for example.
However, each of these current alt-coins, as they are known, lack something that only Bitcoin itself offers – a true grassroots evolution. You can’t recreate the way Bitcoin was launched today. There’s too much hype around the space. The fact that there is genuinely no leader, no company, and no central institution to trust is vital for its current value proposition makes it special. Developers can argue all they want about the direction they wish Bitcoin to move. Forks of Bitcoin can be created at will by network participants wishing to make changes to the protocol. However, the success of these efforts is determined by market alone. If users of cryptocurrency think the changed version is a worthy one, they will adopt it. There is no authority who can say: “This is how Bitcoin is now.” This immutability makes Bitcoin the ideal choice for those seeking a reliable store of value from cryptocurrency. To recreate such a situation today, would be incredibly difficult, if not impossible.
As with anything of great value, it’s possible that investors could become the victim of theft. Broadcasting that you own Bitcoin is a terrible idea. Firstly, you make yourself a target for any potential government clampdown. Secondly, and more likely, you increase the risk of you becoming a victim of crime. Even if you own 0.1BTC and go telling everyone you know about your small investment, if John McAfee’s $500,000 Bitcoin comes true, you’ll not only be very pleased, but you’ll also be a potential target for thieves. There have already been several cases of extortion being used across the globe to steal Bitcoin and there will certainly be more to come.
Criminals have also targeted exchanges where many naïve Bitcoin users choose to store their coins. These can become victim of hackings and when they do, the users are often the ones who take the hit. With little regulation covering exchanges, many could potentially disappear suddenly blaming bankruptcy following an attack. The Bitcoin network is beautiful because it’s entirely trust-less. Users need only have faith in mathematics, which is provable. The more time spent using centralised services with cryptocurrency, the greater the risk posed to investors. It’s really that simple.
Minimising the risk
Most of the risks within the space we’ve outlined thus far are outside of an individual investor’s control. There’s no way for the average person, even those with immense capital behind them, to protect against the heavy hand of the government, or quantum computers. Furthermore, if a better, more democratic and usable cryptocurrency were to emerge, a quick switch from Bitcoin to the new tech would be the only way to hedge against Bitcoin’s decline. Staying up-to-date with developments in the space is crucial for serious investors.
That said, users can certainly minimise some of the risks associated with Bitcoin. The easiest way to do this is to learn how to correctly store cryptocurrencies in the safest way possible. Firstly, it’s vital that any cryptocurrency is taken immediately off the exchange. If you’re planning on trading the swings regularly (a risk in itself), then it makes sense to leave your funds where they can be accessed most easily. However, if you consider yourself in it for the long haul, some form of cold storage is vital.
The cheapest and most secure method is to use a paper wallet. A full guide on setting up paper wallets is available here. The link also contains advice about why a paper wallet is preferable to a hardware wallet. However, many users are prepared to sacrifice that little bit of security for the increased convenience of a hardware device – much like credit and debit card users are prepared to risk the use of contactless technology in exchange for the ease with which they can make small purchases. This is fine, and the risk is minimal. For ultimate peace of mind, however, splitting an investment up is the most secure. Allocating two thirds to two individual paper wallets and one third to a hardware solution – all stored in different secret locations is one of the safest ways to protect against prying eyes, or natural disaster-type occurrences that can destroy Bitcoin storage solutions.