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The Bitcoin boom and the real risks

The Bitcoin boom and the real risks

Many seasoned investors are familiar with the concept of Bitcoin, and although opinion is widely divided among the investor community, it’s clear that 2017 has seen a boom in the cryptocurrency that has cocked the eyebrows of curious investors across the globe.

With the digital commodity never straying far from the financial headlines, it’s a good time to get conversant with the cryptocurrency as well as what it can do for you and the inherent risks that come with trading in such a volatile and relatively unproven commodity.

The basic premise of any form of investment, after all, is to buy for a little and sell for a lot, but will investment in Bitcoin be a cryptocurrency cash-in that secures you a prestigious Hollywood address at La Belle or a shortcut to a financial black hole that destabilizes your entire portfolio? There’s no such thing as a sure bet in the world of investment, the best any of us can do is educate ourselves and make informed decisions.

A quick recap

Just in case you spent the past decade on Mars, Bitcoin is a digital cryptocurrency that unlike the dollar, pound or euro has no intrinsic value in and of itself, its value is determined by mathematical algorithms.

Unlike other currencies, it is decentralized, with no ties to the economic well being of any given country or state. This makes Bitcoin theoretically recession proof. As its value is currently at an all-time high, investors are using it for all kinds of transactions from charitable donations to setting up their 401k.

Can Bitcoin work for you?

Like any investment, Bitcoin is neither inherently good nor bad and while there are some investors who seem to be making it work for them, trading in Bitcoin is not without risk (more on that shortly).

Bitcoin is appealing to some investors not only because of its theoretical immunity to economic crashes but because of its ability to be traded anonymously and favourable tax status as it is (as far as tax is concerned) a property rather than a currency.

Some enterprising investors have set up Bitcoin ‘faucets’ that give small amounts of bitcoin to visitors while generating income from advertising revenue.

As with most volatile commodities, it’s best to take a slow and steady approach to bitcoin, incorporating it into a diverse portfolio rather than ‘betting the farm’ on the cryptocurrency.

Know the risks

Since Bitcoin (along with other cryptocurrencies like Ether or Ripple) is currently enjoying a soar in value some investors are certain that Bitcoin’s value has nowhere to go but up, while others insist that it is the very definition of a bubble just waiting to burst.

While time will tell us definitively who’s right, it’s important to note that Bitcoin has experienced crashes before. For investment to work, it’s important that Bitcoin should be treated as a stock investment (only even more volatile). Investors in Bitcoin could theoretically multiply their investment tenfold… but they could just as easily lose everything.

Therefore, treating investment in Bitcoin as highly speculative is the best way to insulate yourself from negative repercussions without precluding yourself from the possibility of a sizeable return on investment.

Jonathon Bailey

Jonathon Bailey