Bitcoin Investment: Potential Losses And Gains

Bitcoin and other cryptocurrencies have attracted new investors due to their potential for massive returns. However, investing in Bitcoin comes with significant risks, and investors must understand that they could lose practically everything. The extreme volatility of the cryptocurrency market makes it challenging for long-term investors to maintain their positions, as double-digit percentage moves in a single day are common. Trading Bitcoin is also risky, and even experienced traders can find it challenging to navigate the large price movements. Additionally, the decentralised nature of Bitcoin makes it a target for hackers, who can drain investors of their cryptocurrency if they gain access to their wallets. Scams and fraudulent activities are also prevalent in the cryptocurrency space, with the Federal Trade Commission reporting losses of over $80 million due to cryptocurrency scams between October 2020 and March 2021. Therefore, investors must exercise caution and conduct thorough research before investing in Bitcoin.

You can't lose more than you invest

If you buy $50 worth of Bitcoin, the most you can lose is that $50 investment. Your money in the bank is completely separate and cannot be touched.

If you buy Bitcoin directly, the worst that could happen is that the asset's value goes down to zero. In that case, you would lose your entire investment, but you would still have the same amount of Bitcoin. For example, if you bought 1 Bitcoin for $7,195 at the start of 2020, it would have been worth $18,562 by November 9, 2022, a loss of 73% from its peak of $69,045 in November 2021. However, the chances of Bitcoin dropping to zero are slim.

If you use credit to buy Bitcoin, such as a credit card, and you lose, you may have to pay interest charges on the credit. It is not recommended to buy Bitcoin on credit.

Additionally, if you gain some profit from your Bitcoin investment and then lose it all, you will lose more than your initial investment, but this will be a loss of potential profit in addition to your investment.

It is important to note that while you can't lose more than you invest in Bitcoin, there are other risks associated with it, such as scams and hacking.

Trading risks

As with any investment, there is a risk of loss when investing in Bitcoin. Here are some of the key trading risks to consider:

Volatility

Bitcoin is one of the most volatile asset classes available. The price of Bitcoin can fluctuate significantly in a short period, making it challenging for long-term holders to maintain their positions. For example, if you had invested in 1 Bitcoin at the start of 2020, you would have experienced significant ups and downs, including a 53% drop in price between April and July 2021 and a 73% drop between November 2021 and November 2022. This volatility can make it difficult to predict the value of your investment and can lead to substantial losses if the market moves against you.

Trading Bitcoin can lead to significant gains, but it is not without risk. The large price movements in Bitcoin can make it easy for even experienced traders to make losses. Poor trading decisions or mistiming the market can result in substantial financial losses. Therefore, it is essential to approach trading with caution and consider practising on simulated trading platforms before investing real money.

Scams and Hackers

Financial scams and hacker attacks are a significant risk in the cryptocurrency market. Scammers often target cryptocurrency investors, promising insider investing tips or pretending to be celebrities offering giveaways. These scams can result in the loss of your entire investment. Additionally, hackers have targeted Bitcoin wallets, draining individuals of their cryptocurrency holdings. It is crucial to prioritise security and be vigilant against potential scams and hacker attacks.

Choosing the Wrong Cryptocurrency

With many cryptocurrencies available, it can be challenging to predict which ones will stand the test of time. Investing in a cryptocurrency that fails to gain widespread adoption or loses popularity can result in significant losses. It is important to research and understand the distinguishing features, applications, and potential of each cryptocurrency before investing.

Storage and Accessibility

Storing your Bitcoin securely is essential, but it comes with risks. If you choose to store your Bitcoin in an offline ("cold") wallet, you risk physical theft or losing access to your holdings if you lose your password. On the other hand, hot wallets connected to the internet may be more vulnerable to hacker attacks. Additionally, the collapse of cryptocurrency exchanges, as seen with the failure of FTX, can result in the loss of your holdings.

Scams and fraud

Cryptocurrency scams are constantly evolving, and thieves are using both new and old techniques to steal money. Scammers will do anything to get their hands on your crypto, just as financial criminals will try to steal money from your bank account or put fraudulent charges on your credit card.

• Social engineering fraud: These scams use psychological manipulation and deceit to gain control of vital information relating to user accounts. Successful scammers will condition people to think they are dealing with a trusted entity, such as a government agency, a well-known business, or a community member. They will take as much time as necessary to gain the trust of a potential victim before asking them to reveal private keys or send money to their digital wallet.
• Frauds promising romance: Scammers use dating websites to make unsuspecting individuals believe they are in a real relationship. Once the individual trusts the scammer, conversations shift to lucrative cryptocurrency opportunities and the transfer of coins or account credentials. According to the FBI, over $735.8 million was lost in romance scams in 2022, and more than $652.5 million was stolen in 2023.
• Imposter and giveaway scams: Scammers pose as celebrities, businesspeople, or cryptocurrency influencers and promise to match or multiply the cryptocurrency sent to them. They create a sense of validity and urgency, leading people to transfer funds quickly in hopes of receiving an instant return.
• Phishing scams: Phishing scams are the most common type of attack on consumers. Scammers send an email with links that lead to a specially created website and ask victims to enter their private keys. Once the hackers have this information, they steal the victim's cryptocurrency. According to the FBI, more than 300,000 people fell victim to phishing scams in 2022, and 298,000 in 2023, turning over a collective sum of over $70 million.
• Blackmail and extortion schemes: Blackmailers claim to have a record of adult websites or other illicit web pages the user frequents and threaten to expose the individual unless they share their private keys or cryptocurrency.
• Fraud involving investment or business opportunities: Misleading websites offer "guaranteed returns" or other setups where investors must invest large sums of money for "guaranteed" returns. These bogus guarantees often lead to financial disaster when individuals find they can't get their money back.
• Initial coin offerings (ICOs) and non-fungible tokens (NFTs): Scammers create fake websites for ICOs and instruct users to deposit cryptocurrency into a compromised digital wallet. In other instances, the ICO itself may be at fault, with founders distributing unregulated tokens or misleading investors about their products through false advertising.
• Rug pulls: Project members raise capital or crypto to fund a project and then suddenly remove all liquidity and disappear with the money.
• Man-in-the-middle attacks: When users log in to a cryptocurrency account in a public location, scammers can intercept their private, sensitive information, such as passwords, cryptocurrency wallet keys, and account information. A virtual private network (VPN) can help block these attacks by encrypting all transmitted data.
• Social media cryptocurrency giveaway scams: Fraudulent posts on social media promise bitcoin giveaways, sometimes including fake celebrity accounts to lure people in. When someone clicks on the giveaway, they are taken to a fraudulent site asking for verification, which includes making a payment or clicking on a malicious link that steals their personal information and cryptocurrency.
• Ponzi schemes: These schemes pay older investors with proceeds from new ones, luring new investors with the promise of huge profits and little risk. There are always risks with these investments, and there are no guaranteed returns.
• Fake cryptocurrency exchanges: Scammers lure investors with promises of a great cryptocurrency exchange, sometimes even offering additional bitcoin. However, the investor later discovers that the exchange is fake and loses their deposit.
• Employment offers and fraudulent employees: Scammers impersonate recruiters or job seekers to gain access to cryptocurrency accounts. They offer interesting jobs that require payment of a fee in cryptocurrency or ask for cryptocurrency as payment for job training.
• Flash loan attacks: Flash loans are short-term, collateral-free loans that are popular in the cryptocurrency market for making quick trades. Attackers borrow money and use it to manipulate pricing on a decentralized finance platform by creating multiple buy-and-sell orders to create the impression of high demand. They then cancel the orders after prices increase, causing the price to fall, and profit by buying at a lower price on a different platform.

To protect yourself from cryptocurrency scams, be wary of the following red flags:

• Promises of large gains or double the investment
• Only accepting cryptocurrency as payment
• Contractual obligations
• Misspellings and grammatical errors in communication
• Manipulation tactics, such as extortion or blackmail
• Promises of free money
• Fake influencers or celebrity endorsements that seem out of place
• Minimal details about money movement and the investment
• Multiple transactions in one day

Additionally, practice good digital security habits such as using strong passwords, secured connections, and safe storage for your digital wallet.

Hackers

The threat of hackers is so serious that even the Justice Department has acknowledged it, making its largest-ever financial seizure of $3.6 billion in cryptocurrency linked to a 2016 hack of the Bitfinex exchange. In this instance, a New York couple, Ilya Lichtenstein and Heather Morgan, were arrested and charged with money laundering and conspiracy to defraud the United States. The couple allegedly conspired to launder the stolen Bitcoin through a series of complex transactions across various digital platforms and accounts.

The volatile nature of Bitcoin and other cryptocurrencies, combined with the constant threat of hackers, makes investing in Bitcoin a risky endeavour. While it offers the potential for massive returns, investors also risk losing practically everything in an instant.

Volatile markets

Bitcoin is considered a volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The more volatile an asset, the more risk is associated with holding it. Volatility can be a good or bad thing, depending on whether it measures positive or negative returns.

Bitcoin's volatility is measured by how much its price fluctuates relative to the average price over a given period. The volatility of Bitcoin depends on what other cryptocurrencies you compare it to. For example, the volatility of gold averages around 1.2%, while other major currencies average between 0.5% and 1.0%. Bitcoin's volatility has been declining and is expected to continue doing so.

The cryptocurrency industry thrives on speculation. Crypto investors bet on Bitcoin's price going up or down to make a profit. This causes a sudden increase or decrease in Bitcoin's price, which leads to volatility.

Bitcoin's volatility can be an opportunity for traders. By quickly moving in and out of Bitcoin, they can book profits and jump out before the trend turns. If you are an agile trader and can make a 5% gain per week, that amounts to an annual return of over 250%.

However, the movements in Bitcoin's price are so great that even experienced traders can easily get whipsawed and lose a lot of money. Poor trading is probably the easiest way to lose money with Bitcoin.

Bitcoin's volatility is also linked to its market cycle and price. Low volatility has historically occurred at the end of long bear markets when all the selling has been exhausted and seller energy is low. This is when Bitcoin's price bottoms out and begins to increase. As the price rises, so does the number of addresses in profit, and this can be offset by new buyers entering the market, keeping prices high for some time.

Bitcoin's volatility has seen new all-time lows on a yearly scale. There is a clear downward trend in volatility over its lifetime, and this trend is expected to continue as Bitcoin matures.

Frequently asked questions