Funny finding an article like this on a cryptocurrency blog, right? All said and done, Bitcoin is the most popular currency embodiment of a revolutionary technology. However, it is not without flaw. This is by no means to discourage you from buying Bitcoin, but just a few cautionary points for the first time investor to keep in mind before entering the crypto world. If you’ve been in crypto for a while, you probably know most of these points. But if you’re just starting you, here are 5 reasons to beware of Bitcoin –
- Extremely volatile
Cryptocurrency prices are highly volatile. The prices may fluctuate from $2000 USD per Bitcoin to $17,000 USD per Bitcoin. Unlike national currencies, whose value is regulated within a given range by central banks; Bitcoin is an open ledger, a decentralized platform that is completely regulated by the market.
It is also difficult to predict the future value of these coins. “Historical data has shown that Bitcoin can become 1/4th or double the price within the span of days or even hours.” This has happened in the past when investors bought Bitcoin at $1000 per coin. But when the prices fell back to $300, they incurred massive losses. Though the prices have been rising overall, the future is still uncertain.
The prices solely depend upon demand and supply. Supply is limited, which drives these prices. There is usually incomplete, asymmetric information among coin holders, which differentiates demand and makes it difficult to speculate. The crypto world is like a bubble. As prices keep rising, more people are lured into the market. This bubble keeps expanding that has to eventually burst. This will lead to massive losses.
- No legal status and support yet
The status of Bitcoin is still very ambiguous in the market. While countries have not interfered much yet, Bitcoin does not have the legal status of ‘currency’ too. It is possible that if countries like the United States or Japan announce it to be illegal the next day, the whole market will crash. This has happened in the past when China banned Bitcoin to prevent money laundering. Values of virtual currencies went downhill rapidly. Cryptocurrencies have been banned in five countries till now, and there is no guarantee about their future in other countries.
Cryptocurrencies are still considered to be in their experimental stage. Its users, creators as well as the government do not know what direction it will take. When Bitcoin’s value started with a few cents, it was no major problem. But now that it crosses $17,000 per coin, with a market cap around $278 billion, it has the potential to manipulate a country’s economy. This puts a country at risk. Thus, as virtual currencies grow larger and powerful, government regulations are likely to increase. After all, states do not want a currency they cannot control.
- Lack of regulation and insurance
Unlike national currencies, such as dollar or yen, cryptocurrencies are not the responsibility of any nation-state. When there are fluctuations in the value of the dollar, the U.S. Treasury regulates it with the help of FED (Federal Reserve System). Other countries have their own central banks and macroeconomic policies to regulate and support their currencies. However, Bitcoin or other digital currencies are not backed by some rigid system. In case if all the million dollars on blockchain disappear tomorrow, there is no one to be held responsible for that.
In fact, there have been various fraudulent Bitcoin cases. Though cybersecurity is rigid on the blockchain, the lack of appropriate authority makes it susceptible to online thefts and frauds. There is no one to address frauds and the money is gone forever.
Also, there have been cases where investors find it difficult to liquidate their coins and withdraw money. There is lack of clarity and misinformation about Bitcoin trading in the market. Some traders do not allow investors to withdraw their money in real currencies. Instead, they are forced to exchange into other cryptocurrencies. This makes it risky for investors to invest in virtual currencies.
- Prone to illegal activity
It is well-known that virtual currencies are the vehicles for illegal activities. Due to anonymous transactions on the blockchain, terrorists and criminals have been abundantly using it to their advantage. Money is laundered by corrupt politicians, transaction among organized criminals (for drug and human trafficking) has become easy and terrorist easily get anonymous funding now.
There is lack of government control. On top of that, criminals have found ways to hide their addresses. So government agencies and companies find it difficult to track their addresses. If the emergence of grey economy and illegal activity increases, Bitcoin can get banned in more countries (as it did in China).
- Remittance issues
Though Bitcoin is largely used for trading, it still cannot be used like regular currency. For instance, no store would accept it to buy a bottle of cola and chips. It is usually not accepted because of its fluctuating prices and lack of legality. Normal traders still do not consider it as real currency.
In fact, there is confusion whether to consider it as a currency or an asset. It is intangible and exists only virtually, driven solely by the nature of demand and supply. Traders are worried that if this digital network is wiped without a trace, unlike dollars or gold, the lost money cannot be claimed back.
However, while there are many reasons to be beware of Bitcoin, the Bitcoin market is too profitable for investors to not invest.
In these past years, the value of Bitcoin has increased way more than the value of stocks/shares of any company, including Apple and Microsoft. Since the start of this year, Bitcoin price soared up by more than 1000%. People who initially bought Bitcoins for a few hundred dollars or even for a few cents are millionaires now.
This is because while the supply of Bitcoin is limited (at 21 million Bitcoins), its demand is continuously rising. A range of services is provided on blockchain now. For instance, smart contract service on Ethereum, banking and insurance, gaming and entertainment, etc. These services are deemed to be more efficient and cost-effective on the blockchain. It is predicted, that in future, blockchain will replace services like the internet replaced them in real life. Thus, since cryptocurrencies are used for these payments, the future for them is very profitable.