Risks and misconceptions about bitcoin investment
Bitcoin is not backed by anything
For some reason everyone thinks bitcoin is a currency. In the good old days, coins were minted from gold and silver. Then money was backed by precious metals and stones (gold reserve + paper currency). Today, currency is backed by confidence in the economy of the state that owns the currency.
Bitcoin has no central issuing authority, no notional treasury — it is not controlled by a specific state or government. That said, it has value and can be used as currency. It is based on blockchain technology. Bitcoin’s value lies in its convenience, partly in its anonymity, partly in its cross-border nature.
Bitcoin is limited in the number of currency units (coins) and cannot exceed 21 million. And this limited quantity implies deflation of this currency in the long term.
Potential bugs in blockchain technology
At the heart of the risk is the assumption that a critical error in the code will lead to the devaluation of bitcoin. Critical bugs have not been observed during the existence of this digital currency. But it is certainly possible. Any IT system is potentially error-prone.
There is a very real risk of a bitcoin exchange being hacked. But the protocol itself, the code that runs everything, has never been hacked. If that were to happen, bitcoin would presumably collapse.
Investors can be advised to be careful when buying and storing bitcoins. Large amounts of bitcoins should be stored in hardware bitcoin wallets.
Bitcoin is used by criminals for illegal transactions
Criminals do use cryptocurrencies. The anonymity of bitcoin makes it possible to conduct illegal transactions. Yet bitcoin and blockchain startups have received over $1.5 billion in investments. And the fact that bitcoin and blockchain are being developed by IBM, Intel, Microsoft and other IT giants, and invested in by J.P. Morgan, Bank of America, Merrill Lynch, and Goldman Sachs makes one reconsider the controversiality of these claims about bitcoin’s criminality.
Bitcoin is not regulated
It cannot be said that bitcoin is not regulated — the management of bitcoin exchanges in China essentially drives the exchange rate, as practice shows. And miners mining coins affect what happens to the rate. But BTC is indeed not regulated in the same way as other investment instruments.
Bitcoin exchange rate is too volatile
The price can indeed jump or drop 10 or 15% within an hour, which is considered unacceptable for a currency or most stocks.
But the fact that bitcoin functions as a currency doesn’t mean it’s only a currency. More importantly, it is a way to seamlessly transfer money over the Internet. Bitcoin also allows you to verify ownership of funds when making a transaction.
P.S. A couple of useful links about Bitcoin in Ukraine
Exchanges, BTC wallets
BTC exchangers
You can read more about conditions, features, exchange limits and identification in the post “Exchanging and buying Bitcoin in Ukraine”