The Dark Side Of Bitcoin: Is It Worth The Risk?

Bitcoin is a risky investment. Its value is extremely volatile, and it is susceptible to cyberattacks and fraud. It is also unregulated, and there is no overarching regulatory framework in place. The lack of taxation could also lead to problems if Bitcoin were to pose competition for government currency.

Additionally, there is no tangible way to value Bitcoin as an asset, and it is not insured by the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC).

However, Bitcoin's decentralised nature, its potential to be a non-correlated asset, and its ability to offer high returns make it an attractive investment opportunity for some.

Bitcoin's volatile price

In 2022, the price of Bitcoin dropped from almost $48,000 to lows of around $16,000. In 2021, it fell by more than 75% from its all-time high. In the past, investors have lost millions of dollars of Bitcoin because they lost or forgot their wallet credentials.

The price of Bitcoin can also rise dramatically. In 2020, Bitcoin's value rose from around $3,800 to nearly $30,000. In March 2024, it rose above $70,000 for the first time.

The volatile nature of Bitcoin's price means that, when investing, you should understand that the value can drop quickly and may take years to regain previous highs.

Susceptibility to cyberattacks

Bitcoin is susceptible to cyberattacks due to its nature as a technology-reliant, decentralised cryptocurrency. Its value is highly volatile, and it is often used in black-market purchases.

Bitcoin's decentralised nature means that it is not controlled by a central authority, such as a government or financial institution. Instead, it relies on blockchain technology, which is a digital and decentralised ledger that records transactions. This lack of central control makes it more vulnerable to cyberattacks and online fraud. Additionally, the use of blockchain technology means that transactions are difficult to trace and reverse in the event of fraud or theft.

The volatility of Bitcoin's value also makes it a risky investment. Its price can fluctuate significantly, and there is no way to predict how the market will evolve. This makes it a target for cybercriminals who can exploit its fluctuations for their gain.

Bitcoin is also commonly used in black-market purchases, which further increases its susceptibility to cyberattacks. Its anonymous nature makes it attractive to criminal organisations, and its decentralised structure makes it difficult to regulate and track. This provides opportunities for hackers and cybercriminals to exploit vulnerabilities and carry out illegal activities.

To protect against cyberattacks, Bitcoin users should use secure crypto wallets with strong encryption and regularly back up their wallet information. Additionally, users should be cautious when trading Bitcoins and only use reputable exchanges to minimise the risk of fraud.

Lack of regulation

Bitcoin is a risky investment for several reasons, one of which is the lack of regulation.

Bitcoin and other cryptocurrencies currently operate without any major regulations. The US government, for example, has not claimed exclusive regulatory power over cryptocurrencies, leaving individual states to determine how their citizens can participate. The only concrete statements made about cryptocurrency from federal entities concern how people must report their profits (capital gains to the IRS) and how they are taxed (as property).

Similarly, the European Union has not implemented a unified regulatory framework for Bitcoin. Instead, it has allowed individual countries to decide how to approach the rollout. Switzerland, for instance, has embraced a non-regulatory approach, while Germany has deemed Bitcoin a "unit of account" that is subject to VAT when traded with Euros.

In Asia, the regulatory landscape is even more varied. Japan has been the most welcoming, recognizing Bitcoin as a "legal means of payment". In contrast, countries like Bangladesh, Nepal, and Kyrgyzstan have made it illegal to use or trade virtual currencies, imposing harsh punishments for violators. China, too, has had a rocky relationship with Bitcoin, with strict regulations imposed after an earlier period of no regulation.

The lack of consistent and comprehensive regulation across major economies means that the future of Bitcoin is uncertain. While some countries have embraced its use, others view it as a threat to the integrity of their fiat currencies. This uncertainty makes Bitcoin a risky investment, as regulatory changes could significantly impact its value and liquidity.

The absence of a robust regulatory framework also creates opportunities for fraud and increases the risk of loss or theft. Without clear rules and protections, investors are more vulnerable to scams and cyberattacks. Additionally, the decentralized and anonymous nature of Bitcoin transactions makes it difficult to recover lost or stolen funds.

Furthermore, the lack of taxation on Bitcoin in some jurisdictions could lead to problems if it starts to compete with government-issued currencies. As Bitcoin gains popularity, governments may be forced to take action to protect their fiat currencies, potentially restricting or banning the use of cryptocurrencies.

In summary, the lack of consistent and comprehensive regulation across major economies makes Bitcoin a risky investment. The potential for regulatory changes, the increased risk of fraud and theft, and the uncertainty surrounding taxation and competition with fiat currencies all contribute to the danger. While some countries have embraced Bitcoin, others view it with apprehension, creating a volatile environment for investors.

Technology reliance

Bitcoin is a technology-reliant investment. As a cryptocurrency, it is an online exchange that relies on technology. Coins are digitally mined, exchanged via smart wallet, and kept in check using various systems. Without the technology, cryptocurrency is worthless.

Bitcoin owners are more vulnerable to cyber threats, online fraud, and system shutdowns. The cryptocurrency market is constantly fluctuating, and with such an unpredictable market, there is no guarantee of a return on investment.

Bitcoin is also susceptible to cyberattacks and hacking. Many reports suggest that buyers lose their investments on exchanges and mining losses. Even with the protection of a smart wallet, exchanges are more likely to be hacked. Additionally, if a wallet key is forgotten or misplaced, there is rarely a way to retrieve the coins.

Bitcoin is also vulnerable to fraud. As a digital currency, it is 100% technology-based, and therefore susceptible to online fraud and cyber threats.

The risks of technology reliance in Bitcoin are significant. As a technology-reliant investment, Bitcoin owners face the constant threat of cyberattacks, hacking, fraud, and system shutdowns. The unpredictable nature of the cryptocurrency market further adds to the risk, making it a dangerous investment.

Difficulty in valuing Bitcoin

Bitcoin is a very volatile and unpredictable investment. Its value is subject to wild swings, and there are several difficulties in valuing it as an asset.

Firstly, there are few tangible means to value Bitcoin. Unlike with stocks, where investors can refer to income statements, balance sheets, industry-wide catalysts, and management commentary, there is no tangible data for investors to analyse with Bitcoin. There are transaction settlement times and total circulating token supply, but these figures do not indicate the value or utility of Bitcoin.

Secondly, Bitcoin is not backed by any physical collateral. It is 100% technology-based, and its value is largely based on the cost to mine it. The more profitable mining is, the more participants will enter the market, driving up the price. Conversely, if mining is unprofitable, more participants will leave the market, driving the price down. This creates a vicious cycle until equilibrium is found.

Thirdly, Bitcoin's value is closely tied to its mining difficulty. Mining difficulty refers to the degree of difficulty in discovering new Bitcoin blocks. An algorithm adjusts the mining difficulty depending on the number of miners in the network to ensure that blocks are discovered at a steady pace of roughly every 10 minutes. The higher the number of miners, the more difficult it becomes to mine Bitcoin.

Lastly, Bitcoin is susceptible to fraud and cyberattacks. There have been numerous reports of buyers losing their investments on exchanges and mining losses. Hacking is a serious risk, as there is often no way to retrieve lost or stolen Bitcoins. Additionally, if a wallet is lost or the key is misplaced, the coins are often unretrievable.

In summary, the difficulties in valuing Bitcoin as an asset include the lack of tangible data, the absence of physical collateral, the impact of mining difficulty and profitability, and the risk of fraud and cyberattacks. These factors contribute to the volatile and unpredictable nature of Bitcoin as an investment.

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