Disadvantages of bitcoin

Disadvantages of bitcoin

bitcoin is a buzzword on everyone’s lips, however, you need to speak to your financial advisor to discuss the advantages and disadvantages of bitcoin. Let's discuss how bitcoin or crypto assets could sensibly be incorporated into your financial plan.

Know that this investment is very volatile and is essentially still a massive real-world experiment, and many have lost their money through fluctuating markets and even had traders “disappear” with their hard-earned money.

Below we list the 4 main disadvantages of Bitcoin;

1. Extreme Volatility
2. Complexity
3. Lack of investor protection
4. Ongoing development, essentially in the experimental stage.
5. Scams

Extreme Volatility

The limited number of coins and extremely tall demand for them make bitcoin prices extremely volatile as the price increases/decreases at the slightest good or bad news. For a lot of people, this can be a major red flag in the risk department. Before you invest ask yourself “Can I handle waking up one morning 50% poorer than the night before?”

Complexity

Many people have jumped on the digital currency bandwagon not knowing exactly what the risks are and thus have a very limited knowledge of the subject. For people to successfully use bitcoin and apply it to their lives, they need to be educated.

Lack of investor protection

If your debit/credit card is stolen or lost, the procedure is rather simple – call the merchant, cancel your card and get a new one. With bitcoin, if you lose the wallet which stored your bitcoins, you have lost everything and simply put – it cannot be regained.

Ongoing development, essentially in the experimental stage

Bitcoin software is in its infancy stage with constant changes and development taking place. When parts of the community don’t agree on how the development should proceed then 2 versions of the software are created. This is called a fork.

Essentially a new currency is created in such cases. This is a rapidly evolving landscape and it is difficult to stay on top of all the changes on one network such as Bitcoin, never mind the other 2000+ Altcoins that are in existence.

Scams

Because of the unregulated nature of cryptocurrency and the current hype around it, there are many people taking advantage of unsuspecting investors.

As a rule of thumb, firstly avoid any “investment” in a mining operation, unless you are technical enough to buy your own hardware and operate your own miners just rather stay away. I know so many people that have been scammed and lost their money like this.

Secondly, DO NOT give money to another person to trade on your behalf or invest for you. The most common trick is that after a few months of paying out great returns “Oops I got hacked and lost all the capital of my investor” This is quite common and very difficult to track down or prove once the funds have been taken.

If you want to invest:

1. Do it yourself
2. Buy actual cryptocurrency and don’t make investments in mining operations.
3. Spread your risk. Do not invest everything in one exchange because hacks do happen and surprisingly often. Also, invest in a diversified portfolio of Bitcoin and Altcoins.

Should I buy bitcoin now or am I too late?

Many people will stick to their guns in saying that bitcoin is still one of the best investments out there and I don’t necessarily disagree however precautions need to be taken, it does not mean that it will always be one of the top investments.

The past year has seen unheard of growth (almost 2000%), it is not often that this happens especially in such a short time frame. But shortly after the peak in December 2017 there was a 50% drop.

Once again, I ask; can you emotionally handle that kind of volatility? What if you only invested for the first time in December 2017 and didn’t get the initial growth earlier in the year.

Remember people only talk about their “wins” they are not so quick to share their losses with you. That is why you will hear about everyone making money but are less likely to have people bragging about losing it.

Bitcoin has had a massive run and there has been a substantial correction. Now might be a better time to get in but be careful only take small positions (i.e money that you can afford to lose and that you won't need within the next 24 months) and rather phase into the market with regular recurring investments over a period of time instead of committing one lump sum.

It might grow further, but the growth may be incremental in the face of the previous years’ growth.

The other problem is that the rise in bitcoin brought about thousands of other cryptocurrencies that are worth having a look at. Rather diversify your portfolio amount a few good crypto assets and currencies than taking a stake in only one currency (diversification is key).

Bitcoin is just the beginning of cryptocurrencies and barely scrapes the surface of what cryptocurrencies are capable of. I truly believe this is the future of our financial infrastructure, but I have no doubt that the bitcoin we know today will not exist in the future.

Sell or hold onto my bitcoin, what is the best thing to do?

The first thing we would recommend you do is to ask yourself why you are thinking of selling; are you unsure of the future growth of your investment? Or do you need to liquidate your holdings due to the need for cash?

The answer will differ from person to person. You need to ask why you invested in the first place? Are the reasons still valid or are you just feeling panicky?

Be careful of making emotional decisions, evaluate the rationale for your investment and overall strategy, if you have a plan and it still makes sense-stick to it. If you don’t have a plan you will always be at the mercy of your emotions and market fluctuations. This will cost you money in the long run since you are then no more than a gambler.

If you are unsure of what to do, speak to our Certified Financial Planner who will help you plan your wealth strategy better.