No matter where you stand on bitcoin, we can agree on one thing: It’s polarizing. Some investors believe it’s the way of the future and others think it’s a scam.
However, it’s gaining popularity. It’s likely that the coronavirus pandemic accelerated its acceptance by pushing more retail online. Now, more than one-third of small- and medium-sized businesses will now take bitcoin as payment.1 And even bigger businesses like Microsoft are starting to accept it.2 Also, fans of bitcoin see it as a safeguard against inflation. And since the Federal Reserve has been printing money left and right, some are getting nervous about the future of the dollar.
You might be wondering: Should I jump on the bitcoin bandwagon, or run in the opposite direction? Here are four risks I want you to consider before taking the plunge:
Bitcoin is one of the most volatile investments you could make
Bitcoin goes through incredible spikes and plummets in value. Back in July of 2010, a year after bitcoin was released to the world, a bitcoin was worth only eight cents. The value jumped all over the place until it really started to make some waves in 2017. One bitcoin reached a value of $1,000 early on, then zoomed to $5,000 in October, then doubled to $10,000 in November. By mid-December one bitcoin’s value was almost $20,000. The bubble finally burst, and the value dropped to about $3,500 by November 2018.3
But bitcoin’s value started to skyrocket again in 2020. Just a couple weeks ago, the value of a bitcoin had hit an all-time high of just under $42,000—but then tanked within 24 hours down to $34,863.4
Will it continue to grow in value? We don’t know. But the reality is that volatility always equals risk. And risk isn’t a bad thing, but you need to be aware of what it might cost in the end.
Bitcoin has a bit of an identity crisis
Does bitcoin have more in common with the U.S. dollar or with gold? The answer is both. While bitcoin is a currency, Uncle Sam has a different take. The Commodity Futures Trading Commission sees bitcoin as a commodity (like gold), while the IRS treats it like property which means—you guessed it—they can tax it.5, 6
We need to keep in mind that bitcoin is still the new kid on the block. While it’s been around for over 10 years now, we still don’t have any tried and true best practices for building wealth with bitcoin.
Bitcoin is not regulated by any central bank or nation
Bitcoin has been shrouded in mystery ever since an unknown person named Satoshi Nakamoto released it into the world back in 2009.7 It operates without oversight from any bank or nation-state, meaning it’s exchanged peer to peer. It’s like the Wild West of currencies—there’s no marshal to uphold the law. For some, this is an attractive feature. Others recognize the risk that comes with zero regulation.
Bitcoin is widely used for illegal activity
Since all bitcoin trading is handled anonymously, the cryptocurrency scene is a hot spot for cybercrimes. All sorts of shady things, from blackmail to phishing to Ponzi schemes to deals done on the dark web, take place using bitcoin.8
Of course, there are plenty of upstanding people who use cryptocurrencies as well. But hackers who know a lot more about coding and software than the average Joe can use that knowledge to their advantage—so be careful.
As you’ve probably guessed, I’m not a fan of bitcoin. I would much rather see you invest your hard-earned cash in proven methods for building wealth, like tax-advantaged retirement accounts and growth stock mutual funds. But if you want to learn more about bitcoin, check out our full blog post on the subject. The most important thing is to be aware, informed, and in control of your financial choices at all times!
Chris Hogan is a two-time #1 national best-selling author, financial expert and host of The Chris Hogan Show. He is a frequent guest on Fox News, Fox Business, Yahoo! Finance, and the Rachael Ray Show. Since 2005, Hogan has served at Ramsey Solutions, where he gives practical money advice on retirement, investing and building wealth. Follow Chris on Twitter, Instagram, Facebook, and YouTube or online at chrishogan360.com.