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Bitcoin has proven to be a huge investment opportunity for many these past years. However, it is reasonable to ask, can you lose money from Bitcoin? As it turns out, all that glitters in the world of cryptocurrencies and bitcoin is not gold, and for every success story, there are 10 stories of losses that have not reached your ears (or that your crypto-investor friends do not tell you about).
Without going any further, between December 2021 and June 2022 bitcoin lost 5/7ths of the value accumulated in the entire previous year. This volatility is one of the characteristics of cryptocurrencies that not everyone tells you about and one of the dangers of investing in cryptocurrencies that you should keep in mind.
Surely you have read a lot of news about the potential of bitcoin and what it can be worth. There are those who talk about more than $100,000 per virtual currency, a very appetizing but also very dangerous candy. Before you jump into the adventure, there are ways you can lose money from bitcoin that you should know.
Tomorrow a bitcoin could be worth nothing
The first of the dangers of investing in bitcoin has to do with the risks you run. Bitcoin reached an all-time high value of over $70,000, but tomorrow it could be worth 0 and it wouldn’t even be the first time in history that something like this has happened. Bubbles and investment fads are not new. They have been going on all our lives.
The first bubble of this type dates back to the 17th century when a single tulip could buy a house. In just one day, from paying 90,000 guilders for 99 tulips to not selling half a kilo of these plants for 1,250 guilders, a loss of 72 times their value in just 24 hours.
In between, thousands of people lost all their savings. The reason is that tulips had ceased to be planted and had become a tool for speculation. The same has happened with bitcoin, whose technological value or value as a currency has been left in the background and today it is fertile ground for speculation. At present, speculating in bitcoins is fine for a trader, but not for a saver. If you want to see your savings grow, there are other places to invest your money.
The tulip bubble is the first, but there have been many more like it. To these, we must add less severe bubbles such as the one that cyclically occurs with gold or oil. Every so often, products or companies become fashionable. Their price rises like foam for no apparent real reason and then deflates.
It is very volatile
In the case of bitcoin speculation, an additional risk is added: its high volatility. It is a bet that can fall 30% in less than a week without problems.
This is one of the biggest risks of cryptocurrencies and bitcoin. Its value changes very quickly and sharply.
The average daily volatility of bitcoin is around 6.5%. In other words, in one day its value can go up or down by that percentage – and that’s only on average! According to one study, Bitcoin’s volatility is four times higher than that of the stock market.
This volatility is an opportunity and at the same time one of the dangers of investing in cryptocurrencies: it is a bet that can fall 30% in less than a week without problems. If you are not constantly aware of the market, you can see your savings evaporate in a matter of minutes. To invest in cryptocurrencies you must be willing to take on that volatility without losing sleep. Do you really see yourself capable?
There is an information bubble about bitcoin
Another one they don’t tell you about bitcoin is also another bubble around bitcoin: the information bubble and we all know how all bubbles end: bursting. Again, it’s not the first time it’s happened either: remember the famous Tibetan Goji berries? They went from being a panacea for your health to being toxic and their trail was lost in the media after accumulating dozens of daily news.
Is the same thing happening with bitcoin and cryptocurrencies? Is there a bubble with cryptocurrencies? This is their search volume, you can look at it or judge for yourself.
With so much data it is complicated to analyze the situation well and very easy to fall into the cognitive bias of loss aversion and FOMO.
FOMO or Fear Of Missing Out is the fear of missing out on something, whether it is a great investment opportunity or a one-off price reduction on a product. In fact, it is one of the tricks that stores use during sales that works best for them.
Bitcoin is not regulated
There is a key question that has to do with security. Is it safe to invest in Bitcoin? And in any cryptocurrency? Well, to a certain extent.
The truth is that bitcoin is not regulated by the National Securities Market Commission (CNMV) or other bodies.
In fact, throughout the history of this cryptocurrency, there have been cases of theft and loss of bitcoin in different exchanges or bitcoin exchange houses that have left their users without their coins. The most notorious case was that of Mt Gox, which collapsed in 2014 and lost its users’ 850,000 bitcoins.
In recent months Coinbase and Crypto.com have suffered similar attacks (and have returned the money to their users). Investing in cryptocurrencies is as safe as the platform you trade on and your own security system.
You can lose everything, even if the Bitcoin rises.
Either because your Bitcoin is stolen, as you have just seen, or because you lose it yourself. If you are obsessed with the security of your cryptocurrencies, there is no safer way than storing them in a cold wallet (a kind of USB) that is not connected to the internet.
The only problem? That you lose the device and don’t remember the private keys to your crypto assets. And the same goes for the transactions you make in cryptocurrencies: you won’t be able to take them back.
You will also pay taxes
Cryptocurrencies have been in the focus of the IRS for two years now, and so have their investors. The tax authorities keep an eye on transactions and operations with cryptocurrencies so that you don’t forget to go through the cashier’s office.
In other words, you will have to pay taxes on your income tax return for the profits you make and also report the bitcoin you have abroad.
Is bitcoin a good investment? There are certainly those who have made a fortune with cryptocurrencies and also those who have lost it.
Investing in cryptocurrencies is a high-risk investment, closer to speculation than real investment. Are you willing to see your savings increase or fall 20% overnight? If you are looking for an adequate return in crypto but also peace of mind, you can use our converter and forecast tool! Happy investing!