Much like buying and trading commodities and government-issued currencies, buying Bitcoin, a kind of cryptocurrency, isn’t a risk-free endeavor. Bitcoin has a volatile price that can make it riskier than stocks and other kinds of investments. However, that volatility can potentially make it more profitable too, which makes it tempting if you’re looking for a life of luxury. Bitcoin is an emerging technology and the knowledge that is needed to securely purchase and store your Bitcoin can add to the risk involved. 

The early days of Bitcoin were marred by hacks and fraud, but with the technology gradually becoming more regulated over time and more widely accepted by global financial institutions, it has largely come out of the shadows now and has begun to gain a degree of legitimacy. As the technology around Bitcoin has gained wider acceptance in recent years, there are new ways to buy, sell, and store Bitcoin that have made it a simpler, more convenient, and more secure investment method. 

If you’re want to buy Bitcoin but have concerns about the security or investment risk, then read on to learn more. 

WHAT ARE THE RISKS ASSOCIATED WITH BITCOIN?

There are three main risks that come with buying and owning bitcoins. 

• Bitcoin’s value could decrease after you buy your bitcoins.

• Someone could get access to your private key and take your bitcoins. 

• You could lose the private key that allows you to get access to your bitcoins. 

The first risk is the same risk that is associated with making any kind of investment, with traditional or bitcoin. Whether you’re buying stocks, bonds, mutual funds, indexes, or lending money, there’s always a chance that the value of your investment will decrease or the other party won’t pay you back. You could even lose your whole investment. 

Bitcoin is a volatile investment, which means that the price can quickly move up or down. If you buy Bitcoin now and later sell it when its value is higher, then you could make a lot of money. Throughout 2020, Bitcoin reached a low value of around $3,800 but closed out the year nearing a value of $30,000. This clearly shows an opportunity for profit to investors who are savvy. Over the last few years, people have made large investments in Bitcoin only to see the price fall from nearly $20,000 per bitcoin to less than $3,500 per bitcoin over a short time. This is a drop of over 80%. If you want to get into Bitcoin, you should keep this possibility in mind. 

There other potential risks associated with your private key. You will never technically physically possess bitcoins. Bitcoin is a digital-only currency. However, your private key is the thing that gives you the ability to spend or transfer your bitcoins, and that gives you ownership over the bitcoins associated with that key.

If someone gains access to your private key, they will be able to transfer your bitcoins into their own digital wallet, and you might not have any way to get your money back.

There are some people who choose to store their private keys on their own rather than using an online wallet. You could do this by writing it down, or keeping it on a storage device like a thumb drive. This is a safe option, especially if the storage device you use isn’t connected to the internet. However, it does leave you open to the risk of losing your private key. There have been some horror stories of bitcoin investors losing tens of millions of dollars worth of bitcoin after losing, throwing away, or washing a storage device with the private key on. 

HOW TO KEEP YOUR BITCOINS SAFE

The best way to keep your bitcoins as safe as you can is to have your private key stored in a device or app that is not connected to the internet, or in a non-digital form, such as written on a notepad. When your private key is stored somewhere that isn’t connected to the internet, it’s known as a cold wallet. 

If you choose to use a physical cold wallet, this could be kept in a fireproof safe or other secure location. A safe deposit box at a bank could be another good option for storage, although these aren’t always going to be sure-proof as items could still be lost or damaged. You could also add an extra layer of protection to your cold wallet by encrypting the device you store it on. If you have your private key written down, alter a few digits so it nobody else can use it. For example, you could change the first number from a 9 and 5, and remember this change, or leave yourself a hint to help you remember it. 

Some people who use bitcoin prefer to keep their bitcoins in an online digital wallet, especially if they often buy and sell the currency or want to have easy access to their digital wallet from different devices. Many online cryptocurrency platforms or exchanges will create a wallet for you when you open your account. 

Some platforms will also keep a lot of the bitcoins in their system in cold storage, which is offline and will only keep a small amount in hot, or online connected, storage for their users. In the same way that a local branch of your bank doesn’t have enough cash to cover all its customer’s deposits in its vault, neither does a bitcoin platform. This means that a hack won’t always put bitcoins belonging to all their users at risk. 

Beyond where you decide to store your wallet, the largest risk factor can be the human element of trading in bitcoin. Cryptocurrency scams are becoming more common, and fraudsters might try to get you to share your private key or account details with them. They could try to get you to install software that then infects your devices and can steal your account information.