Bitcoin and other cryptocurrencies are getting a lot of attention and you may want to get involved and try to make some profits. Be careful though, because there are some serious risks involved. Some are technical and some are more real-world issues. Crypto can be tricky for those who don’t know what they’re doing or aren’t comfortable using what can be complicated and very detailed software and websites.
A common early criticism of cryptocurrencies was “but Bitcoin is full of scams and is mostly used for buying drugs and other dodgy things online”. That does indeed happen and there are some high profile examples such as Mount Gox, the Silk Road and the Crypto Queen, but for most criminals in the world, the currency of choice is still the US Dollar and no-one is trying to ban that. And as some criminals have found out the hard way, Bitcoin payments can often in fact be traced by the police.
Another common worry is that Bitcoin will be hacked. Because of the way it works this is highly unlikely to happen. The Bitcoin network is made of thousands of computers around the world whose main job is to check up on all the others to make sure no-one is attempting a hack. So far, no serious attack on Bitcoin has succeeded and as more computers regularly get added to the network the likelihood of an attack is reducing even more. Another form of hacking attack is possible, however – one that will attack your personal computer or phone. For this reason, it’s now even more important to keep anti-virus and anti-malware software up to date, accept software updates, don’t share passwords and be vigilant against scam emails.
Bitcoin is also famous for its wild swings in value and how a lot of people made and/or lost a fortune at the end of 2017. It’s fair to say it will go through some more of these growing pains over the coming years, so understand how quickly you want to take profits out because you might need to wait several years, depending on the position of the market cycle at the time you buy. There are also many copy-cats and altcoins such as Litecoin and Ethereum. It can be tempting to buy these as they can sometimes perform better than Bitcoin, but not always. This isn’t financial advice, so if you’re thinking of investing then DYOR – Do Your Own Research – and never invest more than you can afford to lose.
Another risk that is less well known until you get more involved is how hard to use much of the software is and the lack of support available if you make a mistake. This area is getting better, but it is still far too easy to accidentally make a mistake that has permanent repercussions. Mistakes can include incorrectly copy and pasting a Bitcoin address (made of 34 random characters), forgetting your wallet password, and sending crypto to the wrong address (done more often than you might think due to the unfriendly software). Any of these may result in the permanent loss of your money with very little in the way of customer support to help you. This is especially risky if you’re not used to handling your computer or phone in a highly detailed and exact way.
Not so much a risk as a fact of like – Crypto profits are taxable. Every country has different tax rules (some don’t tax it at all) so make sure you understand the rules that apply to you. Some exchanges have made agreements with some governments to automatically report to them your crypto activities. The biggest risk then is probably not paying your taxes.
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