We’ve all heard the hype. Bitcoin will replace global currencies. Bitcoin has a possible market cap in the trillions. Bitcoin will make you rich! Sadly, this isn’t true. While Bitcoin has achieved considerable success, and indeed made select individuals wealthy, investing in it is a massive risk.
1. Government regulation could destroy it at any moment
Bitcoins only have value if people are using them, and so, should the government legislate to ban Bitcoin trading, its price would crash. Indeed, it is highly likely that should Bitcoin continue to grow, this is something they will likely do. Countries’ national currencies allow useful macroeconomic controls, and if most people were to use Bitcoin as currency, these controls would be lost. Governments will not easily give up such controls, and thus anti-Bitcoin legislation is all but guaranteed at some point in the future.
2. Large users selling cause price crashes
So you have a large number of Bitcoins, which (theoretically) are worth a lot of money, and you want to sell, but as soon as you start selling, the price begins to crash. Because, Bitcoin still has a small market cap, and some large users control huge stakes of the currency, selling large amounts floods the market immediately dropping the price. Such an instance happened this week, when the US government tried to auction of part of its stockpile of Bitcoins seized from Silk Road. As soon as they announced their intention to sell, price rapidly dropped.
3. Bitcoin exchanges are unreliable, prone to collapse
In February this year, the Mt. Gox Bitcoin exchange collapsed after it “lost” hundreds of thousands of bitcoins, worth millions of US dollars. Users were the ones who lost out, some losing thousands of dollars overnight. As Bitcoin exchanges are not regulated like regular banks, money held by them does not have the same legal protections as money in a bank, meaning that they is no assurance that A) your money will always be available, or B) should something go wrong, you will still be able to cash out.
4. One company controls over half of Bitcoin mining
While the source code which Bitcoin is built around is very strong, it still has several known flaws. One of these is the so-called ‘51% attack’ - a way in which a group which is controlling more than half of the Bitcoin mining power, can create fraudulent transactions. As of today, a group called GHash.IO has finally reached this magic number. While there is no evidence of wrongdoing on their part, fears have been raised nonetheless of Bitcoin’s security being compromised. Not surprisingly, Bitcoin values are falling rapidly.
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