Lessen Bitcoin Risks
If one could lessen bitcoin risks, would involvement become more appealing? You may have heard the cryptocurrency space referred to as the “Wild West” because of the instability and risk investors face. While things are getting better as investors become more knowledgeable, many have paid a heavy price for the education. What gives monetary instruments value – whether a bar of gold, disk of iron, card of plastic, slip of paper – is the belief people have that they are “money”. Throughout time money instruments have been a “consensual delusion” as they all were worthless in so much as one could not eat, drink or use them for practical purposes.
Bitcoin derives its value based on supply and demand, and unlike stocks or bonds that bring in future cash flows, interest and principal income – bitcoin’s only source of return is price increase. In the last year, the price of Bitcoin more than doubled its value in less than two months, then dropped back to less than $10,000 which was still considerably more than levels even six months prior. Can you imagine if the US dollar, the Japanese yen, or any other currency did the same? The economies of those countries would plunge into an inflationary spiral.
Bitcoin has introduced a new category of money, digital currencies based on a combination of cryptography, economics, and game theory – but with an improvement on the manner in which money is shared. Decentralized Bitcoin removes the fear of a single omnipotent entity that controls the money supply and governing rules. The blockchain serves as an online ledger that records and validates all peer-to-peer payments to eliminate double-spending and negates the need for a controlling entity. The blockchain both thwarts centralization and checks inflation with scarcity, as there will only ever be 21 million bitcoins mined. However, a currency must be a store of value, an instrument of exchange and a unit of account – the latter considered to be the most important function, and one that requires the currency to be well-circulated and widely accepted.
So, if this cryptocurrency is so revolutionary, ingenious, and potentially disruptive – why is investing so risky? It narrows down to a couple of issues, one being that cryptocurrencies are easy to lose. Uninformed investors that fail to learn proper security practices put their coins at great risk. It is the one monetary space where individuals must accept 100% accountability for their own actions for there is no safety net or recourse for mistakes.
The second issue is that Bitcoin is still a new, emerging technology and no one really knows the impact it will have in the future. Government regulations, limited adoption, volatility, and lack of liquidity are all risk factors. Ease of use also remains an entry barrier for non-tech savvy individuals.
Maximize Bitcoin Potential
Those seeking to lessen bitcoin risks must dive deeper than the surface reports and hype covered by the media. In reality, few so-called experts, articles or news reports are accurate and do more to spread FUD (fear, uncertainty, and doubt) than anything else. Millennials are much more likely to invest in cryptocurrency, as they have an overall distrust of the stock market or traditional investments. The message is appealing to millennials who saw their career prospects dwindle during the financial crisis before ever really entering the job market. Millennials are also highly tech-savvy and have no fear of jumping thru the hoops required to secure private keys, buy, sell, or trade this revolutionary new currency.
Smart investors in any asset realize the importance of resisting the temptation to jump in at all-time highs. Waiting for market fluctuations and buying the dips is one way to lessen bitcoin risks. Investing in a physical hard wallet to avoid holding cryptocurrency assets on exchanges eliminates the risk of hacking. Contrary to popular belief, exchanges and individuals get hacked. Back in 2010, one year after creation, someone was able to create bitcoins out of thin air – the protocol developers at the time deployed a soft fork to fix the bug and the crisis was averted. Since then, bitcoin has been attached but hacking efforts have been unsuccessful. The price was about $0.08 at the time.
Also in 2010, entrepreneur Wences Casares was unconvinced Bitcoin did not have vulnerabilities that could be exploited and hired two expert security teams for $500,000 with the sole purpose of breaking the system. Six months later, the experts were unsuccessful and reported it could not be done because Bitcoin software was solid, well-built, and fully supported by the network performing as intended.
The fact is, it is still a good time to invest in cryptocurrency – particularly Bitcoin. While the market will go up and down, drops will cause panic-sells, and peaks will cause impulse buys, one cannot argue with the tremendous gains already realized and likely to continue. The key is not to invest any amount you cannot afford to lose. Start small and play the market wisely, be patient and invest for long-term gains, not a get-rich-quick scheme. The most important tool to lessen bitcoin risks is to educate yourself and learn how to secure your transactions. It is also advisable to stay abreast of new developments in the crypto-space such as the Lightning Network. Then sit back and enjoy the ride.