Bitcoin Investment: Safe Or Risky Bet?

Bitcoin is a risky investment. It's prone to extreme volatility, and investors have seen its price tumble by as much as 60% in a year. In 2022, the price of BTC dropped from almost $48,000 to lows of around $16,000.

But Bitcoin has also been one of the best investments in the world since it was created in 2009. It remains the world's most popular and valuable cryptocurrency, with a market cap of over $360 billion.

If you're thinking about investing in Bitcoin, it's important to understand the risks. These include market risk, regulatory uncertainty, and cybersecurity threats. It's also crucial to consider your reasons for buying Bitcoin and to only invest what you can afford to lose.

Bitcoin's volatility

Bitcoins Volatility

Bitcoin is considered a volatile investment asset. Its volatility is measured by how much its price fluctuates relative to the average price over a period of time. The volatility of Bitcoin depends on what other cryptocurrencies you compare it to. For example, Bitcoin is less volatile than 33 S&P 500 stocks, and in October 2023, there were 92 S&P 500 stocks more volatile than Bitcoin.

Volatility is a measure of how much the price of a financial asset varies over time. It indicates the riskiness of an asset: the more volatile an asset, the more its value may go up or down substantially. Volatility also increases the cost of hedging, which is a major contributor to the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

Bitcoin's massive potential and its entirely uncertain outlook contribute to its volatility. While Bitcoin has historically exhibited high volatility, when examining its returns, many are disproportionately skewed to the positive side. This is evident in Bitcoin's Sharpe ratio of 0.96 from 2020 to early 2024, indicating that investors have been more than compensated for taking on the risk.

In summary, while Bitcoin is considered a volatile investment, its volatility has been declining, and it has the potential to become less volatile as it matures and becomes more integrated with traditional financial markets.

Regulatory uncertainty

The regulatory landscape for Bitcoin is complex and evolving. In the U.S., the Securities and Exchange Commission (SEC) has stated that Bitcoin is a commodity, and therefore falls under the regulatory purview of the Commodity Futures Trading Commission. However, the SEC has also indicated that ICOs (Initial Coin Offerings) are subject to federal securities laws as they are considered investments where individuals profit from the efforts of others.

The lack of a clear and consistent regulatory framework creates uncertainty for investors and businesses looking to engage with Bitcoin and other cryptocurrencies. This uncertainty is heightened by the fact that different countries are approaching the regulation of cryptocurrencies in different ways. For example, China has effectively made it illegal for citizens to mine or hold any cryptocurrency, while the U.K. and the European Union have released guidelines for ICOs with the aim of harmonizing policies and regulations.

The regulatory uncertainty surrounding Bitcoin has implications for investor protection, innovation, and the development of the cryptocurrency industry as a whole. On the one hand, clear and effective regulation is needed to protect investors from fraud, market manipulation, and other risks associated with the volatile and relatively unregulated nature of the cryptocurrency market. On the other hand, overly restrictive or inconsistent regulation could stifle innovation and hinder the growth of the industry.

It is important to note that regulatory uncertainty is just one aspect of the broader discussion around the risks and benefits of investing in Bitcoin. Other factors to consider include market volatility, the environmental impact of Bitcoin mining, and the potential for Bitcoin to become a universal digital currency.

Security and storage

Bitcoin security and storage is a complex topic, and there are many options available. Here is an overview of the key considerations and methods for keeping your Bitcoin secure.

Understanding the Risks

Bitcoin is generally considered a risky investment due to its high volatility. It is important to be aware of the various risks associated with investing in Bitcoin, including market risk, regulatory risk, and cybersecurity risk. The price of Bitcoin can fluctuate significantly, and it has experienced several major downturns in the past. Additionally, the regulatory environment for cryptocurrency is still evolving, and the lack of clear regulations can pose a risk to investors.

Types of Wallets

When it comes to storing Bitcoin, there are two main categories of wallets: custodial and non-custodial. Custodial wallets are managed by a third party, such as an exchange, while non-custodial wallets give users full ownership and control of their private keys. Another important distinction is between hot wallets and cold wallets. Hot wallets are connected to the internet, making them more convenient but also more vulnerable to hacking. Cold wallets, on the other hand, are offline and considered more secure but less convenient.

Best Practices for Security and Storage

• Use a combination of hot and cold wallets: By using both types of wallets, you can balance security and convenience. Keep the majority of your funds in cold storage and only keep a small amount in a hot wallet for transactions.
• Choose a secure crypto wallet: Select a reputable and secure crypto wallet that offers strong encryption and security features. Examples include hardware wallets (such as Ledger Nano X or Trezor Model T) and software wallets (such as Electrum or Armory).
• Back up your wallet regularly: Back up your Bitcoin wallet frequently to prevent loss of funds due to computer failure or other issues. Store the backups in multiple secure locations.
• Keep your software up to date: Update your wallet software regularly to patch security vulnerabilities and enhance the safety of your Bitcoins.
• Enable two-factor authentication: Many wallets offer two-factor authentication, which adds an extra layer of security to your account.
• Consider a multi-signature wallet: A multi-signature wallet requires multiple keys from different users to sign a transaction, providing increased security.
• Be cautious of scams and fraud: Be vigilant against cryptocurrency scams and fraud attempts, as they are becoming increasingly common. Only use trusted platforms and exchanges.
• Diversify your investments: Don't invest more in Bitcoin than you can afford to lose. Diversify your portfolio to reduce overall risk exposure.

Scams and fraud

Bitcoin Investment Schemes

Scammers pose as seasoned "investment managers" and contact investors, claiming to have made millions investing in cryptocurrency. They promise their victims lucrative returns on their investments. As part of the scam, they request an upfront fee and may also ask for personal identification information under the pretext of transferring or depositing funds. The scammers then simply steal the upfront fees and gain access to the victims' cryptocurrency.

Fake Celebrity Endorsements

Scammers use real photos of celebrities and impose them on fake accounts, ads, or articles to make it appear as though the celebrity is promoting a large financial gain from the investment. They use reputable company names, professional-looking websites, and logos to create an illusion of legitimacy. However, the endorsement is entirely fake.

Rug Pull Scams

In this type of scam, fraudsters "pump up" a new project, non-fungible token (NFT), or coin to attract funding. Once they receive the money, they disappear with it, leaving investors with a valueless investment. The coding for these investments prevents people from selling the bitcoin after purchase. A notable example is the Squid coin scam, named after the popular Netflix series "Squid Game."

Dating App Scams

These scams involve building trust and establishing long-distance, strictly online relationships with unsuspecting individuals. Over time, the scammer convinces the victim to invest in cryptocurrency or send them money in some form of cryptocurrency. Once they receive the funds, they disappear. These scams are also known as "pig butchering scams."

Phishing Scams

Phishing scams are a common type of fraud in which scammers send emails with malicious links to fake websites to gather personal details such as cryptocurrency wallet key information. If a private key is stolen, it is challenging to change it, as each key is unique to a wallet. To prevent phishing scams, never enter secure information from an email link, and always go directly to the legitimate website.

Man-in-the-Middle Attacks

In public locations, scammers can intercept sensitive information, such as passwords, cryptocurrency wallet keys, and account information, when users log in to their cryptocurrency accounts. By using a man-in-the-middle attack approach, they can steal this information by intercepting Wi-Fi signals on trusted networks. To protect against such attacks, it is recommended to use a virtual private network (VPN) to encrypt all transmitted data.

Social Media Cryptocurrency Giveaway Scams

Fraudulent posts on social media promise bitcoin giveaways, sometimes even using fake celebrity accounts to promote them. When individuals click on the giveaway, they are directed to a fraudulent site that asks for verification and payment to receive the bitcoin. The victim may lose this payment or click on a malicious link, leading to the theft of their personal information and cryptocurrency.

Ponzi Schemes

In Ponzi schemes, new investors are lured in with promises of huge profits and little risk. However, there are always risks, and there are no guaranteed returns. The scheme pays older investors with the proceeds from new investors, creating a circular structure with no legitimate investments.

Fake Cryptocurrency Exchanges

Scammers lure investors by promising great cryptocurrency exchange opportunities and even offering additional bitcoin. However, the investor later discovers that the exchange is fake and has lost their deposit. To avoid such scams, stick to well-known crypto exchange markets like Coinbase, Crypto.com, and Cash App.

Employment Offers and Fraudulent Employees

Scammers impersonate recruiters or job seekers to gain access to cryptocurrency accounts. They may offer interesting job opportunities but require cryptocurrency payments for job training. There have also been reports of North Korean IT freelancers posing as remote workers and targeting cryptocurrency companies to gain insider access and steal information or funds.

Flash Loan Attacks

Flash loans are short-term, collateral-free loans popular in the cryptocurrency market for making quick trades. Attackers exploit this by borrowing large amounts of money and manipulating pricing on decentralized finance platforms. They create multiple buy-and-sell orders to create the illusion of high demand, then cancel the orders after prices increase, causing a price drop. The attacker then profits by buying at a lower price on a different platform.

AI-Enabled Scams

With the advancement of artificial intelligence (AI), attackers are finding new ways to deceive cryptocurrency investors. They use AI chatbots to engage with users, promoting fake tokens and providing investment advice. AI can also be used to create deepfakes, where the faces of famous individuals are superimposed onto videos to promote fake endorsement schemes.

Market manipulation

In 2018, the US Department of Justice (DOJ) launched an investigation to determine whether spoofing price manipulation had occurred in the Bitcoin network. The crypto market is still young and growing, which means bad actors will find ways to exploit the lack of regulation.

• Pump and Dump: This involves a group of people working together to artificially inflate a coin's value. They usually target low-market cap coins available on limited exchanges. Insiders buy the coin early and dump it once there is enough attention from traders and investors.
• Whale Wall Spoofing: This strategy involves a whale placing large orders to create fake buy or sell walls in the order books. For example, if they want to create a bearish sentiment, they will set large sell orders to trick investors into panic selling. Once the sell-off occurs, the whale removes their sell orders and buys more at a discounted price.
• Wash Trading: This strategy involves a person or group rapidly buying and selling the same cryptocurrency to inflate the volume artificially. The asset's increased activity gains attention from traders and investors, which distorts the price even more.
• Stop Hunting: This involves whales driving a cryptocurrency's price to a level where market participants have set stop-loss orders. Most people set their stop orders around the same key technical levels. The whale executes multiple sell orders to drive the price down and trigger the stops, causing high volatility and an opportunity to buy the asset at a lower price.
• Diversify your portfolio: Your crypto portfolio should include a mix of different assets according to your risk appetite.
• Double-check with different sources: Don't rely on a single source of information, like the order book, to verify an asset's movement. Compare your asset's data across different sources.
• Focus on historical price trends: Base your decisions on historical price trends instead of recent movements to avoid being influenced by whales inflating volume through wash trades.
• Longer-term contracts vs. perpetual futures: Compare the premium on longer-term contracts to perpetual futures to get an unbiased view of the market.
• Dollar-cost average (DCA) with recurring buy: This strategy can lower your exposure to potential market manipulation price swings and strengthen your crypto holdings.

While it is difficult to predict the market, being aware of these common market manipulation strategies can help you make more informed investment decisions.

Frequently asked questions