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Risk: A Critical Component of Bitcoin Investment

Michael Hudson
8 December 2015

Steve Irwin was a renowned wildlife conservationist, educator and television personality. He was also a notorious risk-taker. With bountiful energy and infectious enthusiasm he travelled across continents in search of too-close-for-comfort encounters with some of the world’s deadliest creatures, frequently putting himself in potentially fatal positions. When the news broke on 4 September 2006 that Steve’s death had come at the end of a jagged barb belonging to an 8ft stingray, the world mourned his loss, but there wasn’t much of a sense of surprise or shock.

After all, putting himself into treacherously risky situations as often - and for as long - as what he did, it was somewhat inevitable, accepted even, that he would find his demise at the hand of one of his beloved animals at some point. 

But for Steve, the rewards of the amplified awareness and understanding he created for the planet’s most feared predators far outweighed the risks of his dangerous stunts and hazardous behaviour. And while we may not need to take such drastic measures for financial rewards, risk is an inherent component of investment that needs to be carefully considered and managed. Most especially when investing in a nascent technology like Bitcoin.

Bitcoin’s Biggest Investment Risk Factors

Volatility

Bitcoin’s price is highly volatile. Today you could be up – way up – and tomorrow, or next week, you may be down – way down. As a disruptive technology still in its early stages of maturity, Bitcoin holders are primarily early adopters,

The good news, however, is that there’s evidence that bitcoin is moving into a phase where speculators are leaving the market, leaving a more stable price in their wake. In fact, 2015 has been the least volatile year in bitcoin’s short 6 year history, showing true signs of a maturing market. The recent price surge was a welcomed surprise, but what's most encouraging is that in the pull back of the rally, the price consolidated above the £200 mark - an inspirational view for the long term outlook.

Security 

Bitcoin as a network is arguably one of the most secure and stable ecosystems ever created. This thanks to the requirement of a majority of independently operated, and widespread, nodes need to accept and verify transactions. 

Bitcoin wallets and the coins contained therein, on the other hand, are susceptible to loss and theft, if they aren’t adequately secured. The trouble with bitcoin wallets, unlike their physical counterparts, is that if they become compromised in any way and coins are lost, you have no course of action to recover them. While physical bank cards can be stopped, and you’ll suffer short-term loss waiting for a replacement, this isn’t the case with bitcoin, Once they’re gone - they’re gone forever. 

So while Bitcoin is brilliant in that it provides you full power of your finances and coins - that power comes with a great responsibility in terms of ensuring your wallet is secured against possible threats. For some with limited technological knowledge, this process can be daunting, overwhelming even, and laden with personal risk. This risk can be mitigated by applying proven security measures, such as:

  1. Deep cold storage
  2. Firewalls and encryption
  3. Offline terminals
  4. Multi-signature
  5. Two-factor authentication

These are just a few of the ways that Bitstocks secure our clients’ (and personal) wallets and coins, providing peace of mind against security threats. 

Regulation

Traditional financial and investment institutions operate within a comprehensive set of guidelines. These regulations are the result of decades of scenarios and circumstances used to determine precedents. This framework allows for effective governance and

Bitcoin was borne of the desire to decentralise,

Until quite recently, it was undecided on how to classify bitcoin. This is now being addressed at a regional level and the European Court has ruled that bitcoin is to be treated as a currency and therefore transactions are exempt from VAT. This is a step forward for the industry as the ruling provides some clarity and the bones of a guideline on how to deal with bitcoin from a legal and commercial perspective. 

I must be clear here - I’m against any attempt to regulate Bitcoin as a network. And I do mean attempt!

It’s rather laughable that they try to regulate a system specifically built to circumvent 3rd party intrusion. By the very nature of its design, it’s practically impossible and an insult to its purpose.

I do, however, believe that regulation of the organisations that have built commercial offerings around Bitcoin is a must. Too many of these organisations are left to create their own rules and processes, and when things have gone wrong, unassuming clients are the ones to take the knock (often in the form of financial loss). 

As the industry continues to mature and bitcoin takes

Until this happens, mitigate personal risk by thoroughly researching any policies and security practices

Sentiment

An interesting relationship for bitcoin is the one between media coverage and it’s value. Since it’s inception, Bitcoin has made headlines - but not always for the right reasons. The media are renown for sensationalism and bitcoin is far from immune. Any news of a negative nature is quick to be run as a feature story, while positive news is far slower to make the proverbial first page. And as an innovative technology, sentiment lies divided between ardent adopters and vehement critics, with little room for neutrality. This is the nature of disruption.

To date, we’ve seen significant volatility on the back of breaking stories - however, this trend appears be dissipating. Most recently, the government used the Paris terrorists attacks to launch a campaign against bitcoin, calling it a ‘tool of terrorists’. While this is an absurd claim for numerous reasons, the fact is that we only saw a 2-3% drop in price, which recovered quickly, indicating that the market is maturing and growing less sensitive to media persuasion. Encouraging indeed.

Is investing in Bitcoin risky? Sure. It’s as risky as any other investment. But here’s the thing, just like Steve Irwin was a unique character and a revolutionary force for the preservation of wildlife, Bitcoin can’t be compared to any other investment today. It’s a unique, revolutionary technology that holds the capacity to change the world of finance as we know it. And as the technology progresses and we see mainstream understanding and adoption, it’s poised to make its investors a healthy return. The words of Barry Silbert, founder of Bitcoin Investment Trust sums it up perfectly: “It is pretty much the highest-risk, highest-return investment that you can possibly make.”

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