Risk involved in investing in Bitcoin

While 2022 proved devastating for investors in both traditional and crypto markets, the potential of the crypto ecosystem has outstripped inflation and centralized asset custody.

No investment strategy could help recover the falling portfolios across traditional and crypto markets as of the beginning of 2022. The market had already begun to collapse by January 2022, with investments made at all-time high prices in 2021 resulting in immediate losses.

Bitcoin’s price has increased so quickly recently, speculative investors have been interested in it. On December 31, 2019, the price of bitcoin was Rs 589914.49; a year later, it had increased by more than 300% to Rs 2385575.45. It continued to rise during the first half of 2021, reaching a record-high price of Rs 5678142.61 in November. After that, it began to decline and has since fluctuated around the Rs 3292154.00 mark.

Therefore, rather than buying Bitcoin to use as a means of exchange, many people do it for its financial potential. Its digital form and absence of a fixed value, however, make its purchase and use fraught with dangers.

  • Regulatory risk: The absence of standardized legislation regarding Bitcoin (and other virtual currencies) raises concerns about its durability, liquidity, and applicability.
  • Security risk: The majority of Bitcoin users and owners did not obtain their coins from mining activities. Instead, people use well-known online marketplaces called cryptocurrency exchanges where users can buy and sell Bitcoin and other digital currencies. Since bitcoin exchanges are digital, they are susceptible to malware, hackers, and other operational issues, just like any other virtual system.
  • Insurance risk: Neither the Securities Investor Protection Corporation (SIPC) nor the Federal Deposit Insurance Corporation insures Bitcoin or cryptocurrencies (FDIC). Some exchanges use other companies to provide insurance. SFOX, a premier dealer and trading platform declared in 2019 that it will be able to provide FDIC insurance to Bitcoin investors, but only for those transactions that involved cash.
  • Fraud risk: Despite the built-in security features of a blockchain, there is still a chance for fraudulent behaviour. For instance, the SEC filed a lawsuit in July 2013 against the owner of a Ponzi operation involving Bitcoin.
  • Market risk: Just like with other investments, the value of bitcoin can change. The currency’s value has fluctuated dramatically during its brief existence. It is highly sensitive to any newsworthy developments and is subject to significant volumes of buying and selling on exchanges. According to the CFPB, Bitcoin’s price dropped by 61% in a single day in 2013, and by as much as 80% in a single day in 2014.