Bitcoin has provided spectacular returns for buy and hold investors. However, some investors have lost money in bitcoin. This article discusses three of the most common pitfalls and how to avoid them.
Bitcoin is a volatile asset because it is in a price discovery phase. One bitcoin will either be worth hundreds of times its current value or it will be worth much less than its current value.
When news breaks, bitcoin can react very quickly and inexperienced bitcoin holders often panic the first time they see their bitcoin investment drop 10 percent in an hour. They wonder: Why is this happening? How low will it go? Should I sell?
Bitcoin is currently off of its all time high in the $1,200s, but if history is any guide, everyone who has sold to minimize their losses will wish they hadn’t before the year is over.
Related Link: Bitcoin Is Not Just A Volatile Bubble
Many investors buy bitcoins thinking they will be rich within a week or two. If bitcoin doesn’t make their dreams come true, they exit their investment or buy into newer and more volatile digital currencies seeking faster returns.
The bitcoin investors who have made millions from small investments did so over a few years. Yes, bitcoin returned 60,000 percent last year, but most of the millionaires minted from that increase had already owned bitcoin for a year or two before.
Bitcoin has made many people rich, but it doesn’t happen overnight. It takes a couple of years. Investors also need to understand that the reward potential is going down every year because the investment risk is going down. The bitcoin ecosystem is gaining users, credibility, entrepreneurs and venture capital. As each of these components increases, the risk bitcoin will crash to zero decreases.
Scams and Fraud
Bitcoin technology lets users transfer funds anywhere in the world as easily as sending an email. That fact, coupled with the irreversible nature of bitcoin transactions and the tendency for bitcoin investors to be risk takers, has led to many investors being fleeced by scams, fraud and theft.
To avoid scams, follow the rule of 'if it sounds too good to be true, it probably is'. The most common scam involves offering interest on bitcoin deposits. Investors need to think - is this realistic? How are they making money? Who are these people? Is it worth the risk?
Fraud and theft are harder to avoid. One technique is for investors to determine credibility of those they are doing business with and to ensure that they can take legal action if problems arise.
Well publicized founders of venture backed companies are very unlikely to defraud customers and work very hard to prevent theft of customer funds. Companies like BitPay, Coinbase, Circle and Bitreserve are all reputable companies with well known executive teams. They will not defraud customers because they will go to jail.
Investors should also ensure that they can take legal action against a company by avoiding foreign companies for the time being.
Related Link: Mt. Gox Bankruptcy Will Force Changes In Bitcoin
The last way investors lose their investment is through bad security practices. There are two forms of bad security practices. Unfortunately, as the first digital currency, bitcoin has exposed the poor state of computer security.
Today, mainstream users cannot store bitcoins in the same cavalier manner they can hold dollars in a bank or securities in a trading account. It is better to think of bitcoins like a pile of cash. If one has $10,000 of cash or more in their house, they treat it differently than $50. Bitcoins need to be thought of the same way. It is important for today’s early adopters to spend an amount of time learning about bitcoin security commensurate to the value of bitcoins they are holding.
There are companies like Circle, Trezor and BitGo working to make bitcoins as easy and safe to use as a bank account, but those services are not widespread, so investors need to educate themselves.
Bitcoin provides what may be a once in a lifetime opportunity for retail investors to achieve their financial goals. By controlling emotion, avoiding fraud and following good security practices, bitcoin investors can position themselves to benefit if bitcoin is as disruptive a technology as the internet was.
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