Bitcoin Investment: Safe Or Risky Bet?

Bitcoin is a highly volatile and risky investment. Its value can fluctuate wildly, and it has no inherent value. While it has been around for over a decade, it is still relatively new and unregulated, making it prone to huge price swings. Bitcoin is also susceptible to scams and cyber theft, and there is no guarantee that you will not lose your entire investment. However, it has also exhibited enormous profit potential in the past, and some experts believe it could become a non-correlated asset similar to gold.

Bitcoin has no inherent value

Bitcoin's value is based on the assumption that others will follow and drive the price higher. This is in contrast to other assets, which have their own intrinsic value or derive value from their connections to other securities. For example, gold is used in industries such as electronics, jewellery, and dentistry, while stocks, bonds, and farmland produce tangible goods or services.

The argument that Bitcoin lacks intrinsic value is based on the idea that value can exist independently of human evaluators. However, this notion is flawed because value is inherently subjective and dependent on human existence. For instance, gold has no inherent value to a man stranded on a desert island; its worth is contingent on human desire and utility.

Bitcoin's value proposition lies in its objective properties, which include decentralisation, censorship resistance, settlement finality, and guaranteed scarcity. These features make it a superior tool for wealth preservation and monetary sovereignty compared to traditional fiat currencies, which are susceptible to inflation and censorship.

Crypto wallets and their security

A crypto wallet is a software product or physical device that stores the public and private keys to cryptocurrency accounts. The term "wallet" is metaphorical in the sense that crypto wallets don't store cryptocurrency in the same way that physical wallets hold cash. Instead, they read the public ledger, which is the cryptocurrency record-keeping system, and show balances in your addresses, enabling transactions.

There are several types of crypto wallets, each with its own features and levels of security. The main categories are hot and cold wallets. A hot wallet is any crypto wallet that is connected to the internet, while a cold wallet is offline and not connected to the internet. Hot wallets are more common because they are easier to use, but they are also more vulnerable to hacking. Cold wallets are considered much more secure, but they are more complicated and require more technical knowledge.

• Use a strong password and change it regularly.
• Enable two-factor authentication for added security.
• Be vigilant against phishing scams and never share your private key with anyone.
• Keep your cryptocurrency trading separate from your personal and work accounts.
• Avoid using public Wi-Fi when accessing your online cryptocurrency exchange or accounts.
• Regularly check your accounts to ensure there is no suspicious activity.
• Stay up to date with the latest crypto threats and protection methods.
• Use a good-quality antivirus program to protect against hacking and phishing attempts.

While crypto wallets offer varying levels of security, it is important to remember that all digital assets and storage systems are potentially vulnerable to cyber theft. Therefore, it is crucial to take proactive measures to secure your crypto wallet and protect your investments.

Scams and fraud

The world of cryptocurrency is awash with scams. Scammers use fake apps, crypto wallets, emails, and even dating websites to lure unsuspecting investors into giving up their private keys and access codes, thereby granting them access to crypto assets. Scammers may also impersonate celebrities, businesspeople, or cryptocurrency influencers, promising to match or multiply any cryptocurrency sent to them.

• Rug Pull Scams: Scammers "pump up" a new project, non-fungible token (NFT), or coin to get funding. Once they have the money, they disappear with it, leaving investors with a valueless investment.
• Phishing Scams: Scammers send emails with malicious links to fake websites to gather personal details such as cryptocurrency wallet key information.
• Man-in-the-Middle Attacks: Scammers intercept information sent over a public network, including passwords, cryptocurrency wallet keys, and account information.
• Social Media Cryptocurrency Giveaway Scams: Fraudulent posts on social media promise bitcoin giveaways, often including fake celebrity accounts to lure people in. When someone clicks on the giveaway, they are taken to a fraudulent site asking for verification and a payment to prove the account is legitimate.
• Ponzi Schemes: Scammers pay older investors with proceeds from new ones, luring new investors with the promise of huge profits and little risk.
• Fake Cryptocurrency Exchanges: Scammers lure investors with promises of a great cryptocurrency exchange, sometimes even offering additional bitcoin. However, the exchange is fake, and the investor loses their deposit.
• Employment Offers and Fraudulent Employees: Scammers impersonate recruiters or job seekers to gain access to cryptocurrency accounts. They may offer an interesting job but require cryptocurrency as payment for job training.
• Flash Loan Attacks: Flash loans are short-term, collateral-free loans that are popular in the cryptocurrency market. Attackers take advantage of this by borrowing money and using it to manipulate pricing on a decentralized finance platform. They create multiple buy-and-sell orders to create the impression of high demand, causing the price to increase. The attacker then cancels the orders and buys the asset at a lower price on a different platform, profiting from the difference.
• AI Chatbots: Attackers use AI chatbots to engage with users, promoting fake tokens and providing advice.
• Deepfakes: Attackers use deepfakes—realistic but fake videos or images—of celebrities or business professionals to promote fake endorsement schemes related to cryptocurrency projects.

To protect yourself from scams, it is important to be vigilant and cautious. Here are some red flags to watch out for:

• Promises of large gains or doubling your investment.
• Accepting only cryptocurrency as payment.
• Contractual obligations.
• Misspellings and grammatical errors in emails, social media posts, or other communications.
• 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, it is crucial to practice good digital security habits, such as using strong passwords, secured connections, and safe storage for your digital wallet.

Volatility and market risk

Several factors drive Bitcoin's volatility, including Google Trends, total circulation, consumer confidence, and the S&P500 index. The speculative nature of the market, with investors buying in the belief that prices will rise, also contributes to volatility.

The impact of volatility is twofold. On the one hand, it offers the potential for high returns, attracting investors seeking significant profits. On the other hand, it poses a significant risk, as investors who bought Bitcoin at its peak in December 2017 saw its value drop by more than 60% just weeks later.

The lack of regulation in the cryptocurrency market further exacerbates the volatility and market risk. The relatively new and unregulated nature of this market makes it vulnerable to instability and susceptible to the actions of scammers. Regulatory changes and shifts in investor sentiment can also contribute to Bitcoin's volatility.

To mitigate market risk, investors are advised to exercise caution, conduct thorough research, and diversify their portfolios. It is recommended not to invest more than one can afford to lose, as the volatile nature of Bitcoin means there is a chance of significant losses.

While Bitcoin has some security benefits, such as the use of blockchain technology, the volatile and unpredictable nature of the market poses a significant challenge for investors considering adding Bitcoin to their portfolios.

Regulatory uncertainty

In the US, the Securities and Exchange Commission (SEC) has been particularly active in scrutinising the industry, investigating and taking action against Initial Coin Offerings (ICOs) that violate securities laws. The SEC has stated that ICOs are subject to federal securities law, classifying them as securities rather than currencies. This has significant implications for investor protection and compliance requirements.

Other countries have also been grappling with how to regulate cryptocurrencies. For example, China has completely refused to recognise virtual currencies, banning their trading and the issuance of ICOs. In contrast, the UK's Financial Conduct Authority has been working with the Treasury Committee to analyse the risks and opportunities presented by cryptocurrencies and blockchain technology.

The lack of consistent and clear regulation across jurisdictions creates uncertainty for investors and businesses. It also raises concerns about investor protection, as the absence of regulatory oversight can leave investors vulnerable to financial losses with little recourse for redress.

The regulatory landscape is expected to continue evolving as policy-makers and regulators strive to understand the technology and its implications. This evolving regulatory environment will likely have a significant impact on the development and adoption of Bitcoin and other cryptocurrencies.

Frequently asked questions