- COVID-19 had shaken the Wall Street market, leaving the throne for assets that are not affected by economic circumstances.
- Amid such unprecedented times, Bitcoin witnessed a 60 per cent increase in price,
- Though Bitcoin showed a higher acceptance during the pandemic, there are still many risks involved in investing in this digital asset.
While traditional stock markets are prone to experiencing high volatility due to changing economic or political situations in the world, cryptocurrencies are not affected in the same way. They tend to be influenced by unprecedent, almost overnight events and mostly by supply and demand.
The success of Bitcoin (BTC) could be most likely attributed to vast cash flow in 2015, when it seemed that most venture investors decided to take a chance with the cryptocurrency. Since that year, Bitcoin has evolved a lot, peaking at almost US$20,000 in December 2017. In 2020 alone, Bitcoin saw an increase of 60 per cent, as conventional markets were significantly plummeting.
How did Bitcoin reach prosperity in 2020?
There is a simple reply to this question, but the real answer may have several layers:
- Limited supply – Unlike unlimited sums of fiat currencies, Bitcoin has a fixed amount of cryptocurrency coins in circulation. Bitcoin creators had set the amount at 21 million BTCs, and it is currently impossible to mine any more than that. As of 2020, there are around 18.5 million Bitcoins left to purchase or trade, but the last 21 millionth BTC is expected to be mined by 2140. However, some experts think that mining more Bitcoins could be possible later. Due to its limited supply, Bitcoin enjoys high popularity amongst investors as it creates a feeling of undersupply.
- Incoming digital revolution – As millennials and Gen Z are slowly taking over the active workforce, experts believe that digital assets will become mainstream while replacing traditional finance. There are already some signs this might happen in the near future, hence it pushed investors to create a diversified portfolio with a fraction of Bitcoin crypto.
- Most famous cryptocurrency – Ever since a group of unknown individuals created Bitcoin in 2009, it became one of the first and most popular digital assets. Some could even say that Bitcoin is doing well because of its well-respected reputation, especially after its acceptance rose at the beginning of this year. Comparatively, the second most-famous crypto Ethereum is worth five times less than Bitcoin.
However, there are many reasons why Bitcoin could be a possible recipe for disaster, which you can read below.
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Why could the Bitcoin investment be a bad choice?
- Unlimited supply?
In theory (and how they were designed), Bitcoins have a fixed supply of 21 million cryptos. However, in reality, the Bitcoin protocol could easily change, and computer programmers (miners) could decide to mine more Bitcoins. This scenario will likely happen if the demand becomes unbearable.
As a comparison, physical assets like precious metals (mostly gold) are physically impossible to exist in a higher amount. That is why the feeling of scarcity is real and investors are attracted to them. On the other hand, Bitcoin does affect investors in that way, but, could be altered in the future.
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- Possible attacks on the network
Most cryptocurrencies use military-grade security systems, usually in a form of blockchain technology. The encrypted system does appear safe and most of the time it actually is but cyberattacks are on the rise. There is no guarantee that the network will be hack-proof – it only takes one smart individual to crack the code and delve into stealing.
Another thing that could happen is if miners posses large amounts of the network system. As they get rewards for each mined Bitcoin, miners (in theory) could own a lot of Bitcoin network. Centralisation is not making this possibility any better because there is no authority that regulates the Bitcoin circulation. So, if there was a particular miner that owns almost half of the network, the currency itself could be in danger.
- Blockchain is still not widely implemented
Blockchain technology might become a thing somewhere in the future, but it is not there yet. As long as the situation stays like that, it is unlikely that cryptocurrencies will exist for a long time.
Not that the technology is bad, but it takes great minds to create and maintain it. Blockchain is also expensive to set up, so it might take years to get implemented in mainstream systems.
- Traditional currencies could easily appear on blockchain
The truth is, blockchain will probably get more accepted as developers find an easier way of implementing it in banks and similar. Even now, there are some banks that are working on that to happen.
Fiat currencies are not likely to disappear anytime soon, so with the blockchain development, they might exist in the form of digital assets. That said, there will be a high competition between traditional and novel digital holdings, which will not be in favour of Bitcoin.
- Centralised network
Being part of the centralised network is advantageous and disadvantageous at the same time. While it is good not to have a legal authority breathing over the neck, it could be a bad thing in case of fraud or similar. In most cases when Bitcoin is stolen, there is no going back.
- Fraud and theft
Bitcoin offers several wallets to store the cryptocurrency for a reason. Many experts would recommend getting an offline wallet that could not be hacked as easily, but many investors want a more convenient option. As most Bitcoins are stored online, they are a “secure” target for anyone clever enough to get it.
For example, North Korea is infamous for Bitcoin theft, as their economy is mostly isolated from the world.
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- Incoming regulations
When Bitcoin was first introduced, there were not many countries that bothered creating special laws for regulating Bitcoin. Regulations became an item after Bitcoin reached its high peak in 2017 – investors gained a lot of capital and did not need to pay any tax.
Some countries like Australia and the EU recognised the trend on the rise and designed regulatory laws that apply specifically to Bitcoin and cryptocurrencies. Trading Bitcoin might even be less profitable for small investors because the amount of tax they need to pay is just enormous. Before getting into crypto business, it would be smart to check regulations for the country where investors reside.
MORE INFORMATION: How is cryptocurrency going to be regulated in the EU?
- Not a real asset?
Some experts think that older generations will never accept Bitcoin as it does not have a physical characteristic. There are no genuine coins or notes that investors could show to someone, so Bitcoin only exists in everyone’s belief.
At the end of the day, Bitcoin might be seen as having low liability due to the lack of physical resources.
- Losing the key equals losing the money
Purchasing Bitcoins can only be achieved in one way – people get desired wallets plus the key that opens them. Some say that storing the wallet key is the most crucial thing to do if one possesses Bitcoin.
If investors lose the key, there is an easy way of obtaining another one. However, all previously stored Bitcoins will be forever lost, unless the owner remembers the key digits. A possibility of losing the money due to this reason is high, so investing in Bitcoin might not be a good idea if investors do not know where to safely store their password.