Bitcoin: Risky Business And Why You Should Avoid It

Investing in Bitcoin and other cryptocurrencies has become increasingly popular, but there are several reasons why it may not be a good idea. Firstly, Bitcoin is not backed by any asset or regulated by a central authority, making it vulnerable to extreme volatility and cyber attacks. Secondly, its value is hard to determine as it is based solely on speculation and has shown to be extremely volatile. Thirdly, there are serious security concerns as Bitcoin transactions are anonymous and prone to illegal activities, with many cases of hackers demanding bitcoins from users. Fourthly, there is a low barrier to entry for creating new cryptocurrencies, which means Bitcoin may be overtaken by a superior cryptocurrency in the future. Finally, investing in Bitcoin can be a complicated process with tax implications and the lack of investor protection, making it a risky investment.

Bitcoin is not a legal tender

In the United States, Bitcoin is considered property by the Internal Revenue Service (IRS) and is taxed as such. The U.S. Treasury has defined Bitcoin as a convertible currency with an equivalent value in real currency or one that can act as a substitute.

Bitcoin is also not a legal tender in China, which has heavely restricted its use without criminalizing it. In the United Kingdom, Bitcoin is allowed but regulated under the Financial Services and Markets Act.

In the European Union, Bitcoin is recognized as a crypto-asset and is not illegal to use, but the Markets in Crypto-Assets (MiCA) Regulation defines services and assets that fall under regulatory controls.

Other countries where Bitcoin is not a legal tender include Costa Rica, Ecuador, Egypt, Nigeria, Qatar, and Turkey.

The legal status of Bitcoin is constantly evolving, and it is essential to stay informed about the laws and regulations in your specific country before investing or using Bitcoin.

It's prone to illegal activities

Bitcoin is prone to illegal activities due to its unregulated nature and the anonymity it offers to its users. Here are some reasons why Bitcoin is susceptible to illegal activities:

Anonymity

Bitcoin transactions are recorded on a public blockchain ledger, but the identities of the individuals involved remain unknown. This anonymity allows criminals to trade drugs, weapons, explosives, and illegal content such as child pornography, without revealing their identities. Similarly, terrorists can solicit funding and donations for extremist organizations without being identified. The anonymous nature of Bitcoin transactions makes it challenging for law enforcement agencies to track and identify the parties involved in illicit activities.

Ease of Use and Accessibility

Trading with Bitcoin is incredibly simple and accessible. All one needs is an internet connection and a wallet application, which can be quickly downloaded to a device or accessed through a cloud service. There is no need to validate transactions with a central body or third party, and transfers can be made anywhere in the world with just a few clicks. This ease of use and accessibility makes Bitcoin attractive to criminals and facilitates their illegal activities.

Speed and Irreversibility of Transactions

Bitcoin transactions are typically completed within minutes and are irreversible once confirmed by miners. This speed and finality of transactions enable new types of crimes, such as scams and hacks, where funds can be quickly and permanently transferred out of the victim's reach. For example, in the 2020 Twitter hack, accounts of high-profile individuals were compromised to promote a cryptocurrency scam, resulting in the transfer of over $100,000 worth of Bitcoins through hundreds of transactions.

Storage and Transfer

Bitcoin, as a digital asset, is easy to store and transfer. It does not require any physical space, reducing the risk of attracting thieves or authorities. Additionally, cryptocurrencies can be easily transferred locally and internationally without the risk of being seized, making them ideal for money laundering and international trafficking operations.

Lack of Regulation

Bitcoin is not regulated by any government or central authority. This lack of regulatory oversight makes it challenging to hold individuals accountable for illegal activities conducted through Bitcoin transactions. While some may argue that this anonymity is a feature of Bitcoin, it also creates a permissive environment for criminal activities.

There are regulatory risks

Bitcoin is an unregulated asset. This lack of regulation is appealing to investors because it provides anonymity. However, if something goes wrong, the lack of regulation becomes a problem.

The Securities and Exchange Commission (SEC) has warned investors about the dangers of virtual currencies. Decentralized exchanges may record or process transactions outside the borders of a country, limiting the scope of what the SEC can do to help investors retrieve their money if something goes wrong.

Bitcoin is also not a widely accepted currency. Currently, only a few online stores, including Overstock, Newegg, and Monoprix, allow cryptocurrency exchanges. Some travel companies like AirBaltic, Air Lituanica, and CheapAir.com also accept bitcoin.

The future of the bitcoin market is uncertain. There is no overarching regulatory framework for bitcoin like the ones that exist for securities and banks. The regulatory landscape for bitcoin varies across the world, from outright bans to partial regulations to no regulation at all. For example, in 2021, China effectively made it illegal for citizens to mine or hold any cryptocurrency.

The regulatory uncertainty poses a risk to investors. If more countries follow China's example and ban cryptocurrency, bitcoin holders could be in hot water.

It's hard to value

Bitcoin is hard to value because there are few tangible means to value it as an asset. For example, when investing in a publicly traded company, you can refer to income statements, balance sheets, industry trends, and management commentary to make an informed decision.

With bitcoin, there is no tangible data for investors to base their decisions on. There are transaction settlement times and total circulating token supply, but these figures don't tell us anything about the value or utility of bitcoin.

Bitcoin's value is determined by supply and demand, and while the supply mechanism of a cryptocurrency is always known, it is difficult to predict changes in demand. Demand can increase as a project gains awareness, as utility increases, or as a result of broader adoption. For example, when institutional investors started buying and holding Bitcoin in early 2021, the price of Bitcoin increased significantly as demand outstripped the pace at which new coins were created.

Additionally, the lack of regulation in the cryptocurrency market makes it difficult to value bitcoin. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) disagree on whether cryptocurrencies are securities or commodities, and this confusion makes it challenging to determine the appropriate regulatory framework for the exchange of cryptocurrencies.

The volatile nature of bitcoin also contributes to the difficulty in valuing it. As veteran economist David Rosenberg notes, bitcoin and other cryptocurrencies are subject to significant price swings, making them more like gambling than investing.

Overall, the lack of tangible data, the unpredictable nature of supply and demand, the lack of regulation, and the volatility of bitcoin make it challenging to value as an investment.

There are big questions about its underlying value

Bitcoin's value is a highly debated topic. On the one hand, bitcoin has no physical form, and its value is not backed by any government or financial institution. On the other hand, bitcoin has demonstrated the attributes of a currency and is recognised as a medium of exchange. So, what are the big questions about its underlying value?

Firstly, bitcoin's value is not based on any tangible data. Traditional investments, such as stocks, provide investors with financial statements, balance sheets, and industry insights to make informed decisions. However, with bitcoin, there is a lack of concrete information to determine its value. Its price is highly volatile and primarily influenced by investor demand, fear, and greed.

Secondly, bitcoin's value proposition is questionable. While it is often compared to gold due to its scarcity, bitcoin lacks the intrinsic value of gold, which has applications in industries like dentistry and electronics. Bitcoin's value is derived from its restricted supply and increasing demand, but this can be manipulated by programmers who can increase the token limit.

Additionally, bitcoin's utility is limited. With only 18.51 million tokens in circulation and a significant portion held by a small group of investors, there are not enough tokens to facilitate widespread use. This concentration of ownership further reduces bitcoin's utility as a medium of exchange.

Lastly, bitcoin's value is highly speculative. Its value is based on the assumption that others will buy it at a higher price, known as the "greater fool theory". This makes it vulnerable to significant price declines if demand decreases or if a better cryptocurrency enters the market.

In conclusion, while bitcoin has some of the attributes of a currency, there are significant questions about its underlying value. Its value is based on speculative demand, and it lacks the tangible data and intrinsic value of traditional investments.

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