Is it safe to invest in bitcoin? Risks and dangers
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(you must translate the origin, which is preceded by # and the destination id).What are the risks of cryptocurrencies? To understand if investing in bitcoin is safe, you must consider two factors: The security of the bitcoin system (the famous blockchain) and the guarantee of bitcoin as a financial instrument.
Regarding the security of the blockchain, we are talking about its robustness. In this regard, you should ask yourself the following questions: Is the blockchain solid? Can my bitcoin be stolen? Can the blockchain be hacked?.
On the other hand, regarding bitcoin as a financial instrument, you should know if cryptocurrencies are a safe asset to deposit your money.
Next, we will answer all these questions and give you all the key information you need to know before investing in bitcoin.
Security and Risks of Bitcoin
Is bitcoin reliable?
Once you understand how bitcoin works, it's easier to understand its security.
As you may already know, bitcoin relies on a network of interconnected computers known as the blockchain. In order to operate with the internet currency, these computers have installed software, which has been specifically designed to ensure the security of bitcoin.
If you don't know how blockchain works, we recommend reading this article to better understand the following explanation.
The weak points of a blockchain-based system are usually the modification of the blockchain and what is known as double spend or double spending in bitcoin.
However, the cryptocurrency has been designed to protect itself against these threats. The following is how the blockchain has been designed to make bitcoin trustworthy.
Modifying the Blockchain is impossible
On one hand, it is impossible to change the Blockchain to, for example, assign bitcoin from another person to an address that you own.
If you modify any data in a block, its hash changes completely. Remember that each block contains information about the previous block, so you should also calculate the new hash of the next block.
This would cause a chain reaction, so it would be necessary to modify the ENTIRE chain of blocks.
Remember that a hash is a random alphanumeric code constructed from the data of a block. If the data changes, the hash also changes.
Since the blocks have a reference to the previous block, when modified, the data of the next block also changes, altering the hash of both (and the next one, and the next...).
In addition, the blockchain is replicated on every node. Therefore, it would be necessary to change the entire chain of blocks on each of the computers connected to the network. Something that requires a lot of computing power.
The nodes of the bitcoin network are each of the computers connected to its Blockchain. Currently there are more than 10,000.
In order to modify a block of the blockchain, you would need to have a computing speed of at least 51% of the computing power of the entire network.
That is, with more than half of the power, the Blockchain could be altered before the network itself detects it. In bitcoin, this concept is known as the 51% attack.
At the time of writing this article, the total computational power or hashrate of the bitcoin network (provided by nodes and miners) is greater than 32,000,000 TH/s. It can be checked in real-time on the website of blockchain.info.
The current most powerful equipment for mining bitcoins, such as the Antminer S9, does not reach 14 TH/s. That is, more than 1,150,000 megamachines would be needed to successfully execute a 51% attack. There is currently no organization or company with that kind of power.
For example, although this is not public information, it is rumored that Google owns around 900,000 servers, which is less than 1,150,000. In addition, these machines are not specifically designed for cryptocurrency mining, so more would probably be needed.
In conclusion, not even the world's largest technology company has the capacity to carry out a 51% attack.
Protection against double spending
On the other hand, when a malicious user tries to spend their bitcoins on two recipients at the same time, one of the transactions will always arrive to the network and propagate first.
This is achieved thanks to mining, which allows for a consensus to be created and only one of the transactions to be validated. This fraudulent practice is known as double-spend or double spending. That's why miners are a key element in the bitcoin economy.
Other bitcoin security issues
It is true that other security issues have emerged in bitcoin.
For example, in 2014, 650,000 bitcoins were stolen from the Japanese exchange Mt. Gox. However, these security issues are not related to the cryptocurrency blockchain, but rather to the platforms created for its management.
Nevertheless, if your bitcoins get hacked, you will be backed up by these platforms. In all theft cases, these companies have refunded all the money to their users and have allowed them to withdraw their money from their wallets without any problem.
What should you do if your bitcoins get stolen?
The best measure is to prevent it. Due to these issues, one of the basic rules for storing bitcoins is not to use exchange wallets. If you want to know how to securely store bitcoins, we recommend reading this article.
It should not be forgotten that current companies also suffer constant attacks or hacks. Like the ransomware that affected Telefónica in 2017. Not even big companies like Apple, Google, Uber, Facebook, or major banks are 100% protected against hacks.
Just recently, in May 2018, several Mexican banks suffered a cyberattack, through which they stole 300 million Mexican pesos. No computer system is 100% secure today.
The consolidation and regulation of cryptocurrencies will enhance investment in security in these platforms, as has been happening in other traditional sectors. Furthermore, since you have complete control over your virtual money, there are methods to protect yourself against these attacks.
However, despite the security issues on purchasing platforms, we can affirm that bitcoin is secure, as its blockchain is.
The security of investing in bitcoin
Currently, bitcoin is a financial asset with a lot of volatility. Daily variations of more than 10% of its value are common.
The problem is that many people have seen how this cryptocurrency has gone from being worth cents to thousands of euros in a few years. In addition, the media spread articles about people who became rich with bitcoin in a short period of time.
All this led to other (thousands of them) people being attracted to cryptocurrencies and started to invest their money in them. The risk was not the fact of investing in bitcoin, but rather doing it without any financial knowledge.Like these people, many "big fish" in the world of finance set their eyes on cryptocurrencies. They have so much money that they are able to manipulate the price of financial assets at their whim.
These "big fish" are known in the financial world as sharks or strong hands. On the other hand, individual investors are often referred to as small fish.
Therefore, before investing in any instrument, whether it is the Stock Market or bitcoin, it is very important to have financial knowledge. Otherwise, you will probably lose a lot of money.
All this is aggravated with bitcoin, due to its high volatility and the fact that it is not regulated (which is one of its characteristics).
The five risks of investing in bitcoins, according to the CNMV
Because of all this, the Spanish National Securities Market Commission (CNMV) issued a statement in February 2018 warning about the risks of bitcoin.
Specifically, the CNMV highlights five dangers when investing in bitcoin.
Unregulated space
As we have already mentioned, it is one of the characteristics of bitcoin: Decentralization.
As it is not governed within a regulated space, it is not protected by any legislation that prevents fraud, price manipulation, or other illicit activities.
However, most bitcoin investors see this characteristic as an advantage, as they distrust the rules set by regulatory bodies such as the CNMV, which, according to them, prioritize the benefit of the big players and penalize the small shareholder.
Issues derived from the cross-border nature of the phenomenon
These issues are marked by the global nature of cryptocurrencies.
This advantage can also pose dangers, and many cryptocurrency exchanges or ICO issuers may be based in countries with poor legislation.
The best solution is to acquire cryptocurrencies on reliable platforms, widely spread and based in countries with developed financial legislation, such as Japan, the United States, or the European Union.
Regarding ICOs, it is somewhat more complicated since many lie on their own website. To avoid scams, it is necessary to conduct thorough research about them.
Related article: Invest safely in cryptocurrency ICOs
High risk of capital loss
This premise is especially dedicated to ICOs. Most cryptocurrencies rely on projects in progress, with a high probability of failure, making them high-risk investments.
Therefore, it is safer to invest in solid and already developed projects and always allocate money that you are willing to lose, as the possibilities of a collapse are always present in cryptocurrencies.
Liquidity and extreme volatility issues
As we have already mentioned repeatedly, bitcoin and cryptocurrencies are highly volatile.
In these cases, the best option is financial education. If you are determined to invest in an extremely volatile market, you must have sufficient knowledge.
Inadequate information
This is another premise that the CNMV addresses in the ICO market. It is very common to find cryptocurrency launches supported by false information.
In these cases, the best course of action is to investigate. With some education, you will easily detect projects that are scams.
However, this also applies to ICOs as well as to bitcoin and other recognized cryptocurrencies. It is common to find, especially on the internet, people using arguments to seek their own profit.
This is not new. In many Stock forums, you can find people encouraging others to buy or sell certain stocks for their own benefit (and to the detriment of those others). And you can't imagine how many people fall into this trap.
Therefore, it is extremely important to be educated and informed. If you are determined to invest in bitcoin, read all the possible information. Understand its project and invest only if you trust it. Create your own criteria and never rely on what you read on the internet (especially on forums).
Risks and dangers of bitcoin
Ultimately, no one knows the real future of bitcoin. Although there are experts who believe in the bitcoin pattern, no one can guarantee that it will actually be established, let alone know the price at which it may do so, which could be much lower than the current one.
Therefore, before acquiring cryptocurrencies as an investment, it is necessary to understand how to use bitcoin. Currently, it is a highly risky asset.
When it comes to any investment in cryptocurrencies, always remember the following premise: Invest money that you don't need and that losing it wouldn't be a problem.
If investing in stock markets without experience can be dangerous, bitcoin carries even more risks.
However, we don't want to discourage you. Bitcoin is a promising project that is based on solid premises and a secure blockchain.
Nevertheless, it is always good to review the most important concepts we have seen about the risks and dangers of bitcoin:
- The blockchain is impossible to modify and is designed to prevent double spending.
- Before investing in cryptocurrencies, educate yourself.
- It is very important to acquire bitcoin only on verified and widely used platforms.
- The most common dangers of bitcoin are associated with the volatility of cryptocurrencies, bitcoin scams, and fake ICOs.
Did you find it interesting? Learn much more about cryptocurrencies in our bitcoin manual.