5 Risks To Cryptocurrency As An Alternative Investment
Published on 11 February 2016
Given its almost mainstream status, Bitcoin has now gained popularity not only in the tech industry but also in the investment sector. In fact, experts predict an increase in the adoption rate of the popular cryptocurrency next year. This is due to the surging price of the virtual currency on the market, where it has reached to more than $1,000, the biggest price surge in 2013 and standing at $378 as of the date of this article. The price is forecasted to stay above $500 this year, even going as high as $3,500 according to Reuters.
So it is clear to see why some investors will consider Bitcoin as an alternative investment, but why? Simple. Digital methods of trading and payments have now evolved with the continued dependency on technology. This virtual currency is its latest effect and it is expected to disrupt the trading industry massively as consumers become more technically adept when it comes to electronic transactions. In addition, FXCM said that the unpredictability of national physical currencies forced many consumers and businesses to turn to Bitcoin and digital currencies increasing its rate of adoption as an alternative payment solution at even major companies like Amazon, Tesla, and Target, to name only a few. However, as an investor, is Bitcoin a viable alternative investment?
Just like any investment opportunities, owning Bitcoin requires deeper knowledge of its capabilities to grow as an asset. But with seemingly rising tides investors must also be prepared when value decreases. However, what are the possible risks that investors need to be aware of?
Various countries are now looking at the possibility of regulating the cryptocurrency, given its widespread adoption. But, the currency is being linked to various criminal transactions, forcing some governments to ban the usage and sale of Bitcoin. If national governments regulate Bitcoin, then it won’t be too dissimilar from physical money.
Cryptocurrency is entirely digital, thus it’s not safe from hackers or criminals. Once they get your private encryption key and transfer the stolen Bitcoins to their accounts, it is permanent and irreversible.
Although it’s not affected by any economic changes, Bitcoin still faces problems with fluctuating value. If there is a decline in its acceptance across the world, then expect it to lose value and potentially become worthless.
Given its anonymity due to the P2P transactional nature of the cryptocurrency, the electronic currency has been linked to several criminal acts. In fact, the US Federal Bureau of Investigation (FBI) fears the growing popularity of Bitcoin with criminals, as they have “more difficulty identifying suspicious users and obtaining transaction record.” Thus, again, regulation and possibly risk of currency collapse are possible if this trend continues.
The US Internal Revenue Service (IRS) announced that it has considered Bitcoin and other alternative cryptocurrencies as property for the purpose of federal taxes. Bitcoin is ineligible to be in any tax-advantaged retirement accounts, and there’s no legal solution to shield the investment from taxation. In terms of insurance, Bitcoin accounts are not covered by any type of federal or government program. Thus, a collapse in its value means a collapse in your overall investment portfolio, so think twice before making it as an alternative investment opportunity.
On the other side of the Bitcoin
Bitcoin is the latest innovation to currency and commercial transactions we have witnessed since Paypal. As businesses continue to adopt this cryptocurrency as a mode of payment, its appeal as an alternative investment will continue to grow. However, it is clearly not without risk to say the least, which should be considered before making any significant moves towards investing in the virtual currency.
And just yesterday, findaWEALTHMANAGER.com’s Co-Founder, Lee Goggin, commented in an article with UK’s This is Money, “From Bullions to Bitcoins, the Old and New Safe Havens“, that there are more viable alternatives to alternative investments and typical safe havens that investors should consider, especially in the current global market climate.