We have witnessed a rising interest in crypto currencies. Crypto currencies are the digital equivalent of a monetary exchange unit. One of these crypto currencies is Bitcoin which is the most well known. It has witnessed a sensational run and huge traction from people, who had never invested in this currency.
If you are looking to invest in Bitcoins you may be asking the following: is Bitcoin legal? Is it safe to invest in these currencies? Is Bitcoin Wallet safe?
This article will help you find answers to some of your questions. Let’s start with Bitcoin Wallets.
Is Bitcoin Wallet Safe?
Bitcoin Wallet is a virtual place where you can store your Bitcoins. It can be compared to virtual wallets storing currency, except the fact that these store codes. The sales and purchase of Bitcoin is made via blockchain which keeps track of transactions conducted. There are private keys, which can ensure that the bitcoin wallet is safe to hold Bitcoins.
In less than four years, there have been two major events that questions security. Mt Gox, was a Bitcoin exchange with headquarters in Tokyo. It accounted for more than 70% of transactions at that time. In 2014, it reported that 85000 Bitcoins had been stolen. Mt Gox, suspended trading and declared bankruptcy.
In another incident, more than 119,000 Bitcoins went missing from a Hong Kong exchange which was the largest in the world. The value was estimated to be more than $70 million.
These two events alone, show how big a security risk crypto currency can have and fully justify safety concerns.
Hackers have come with new techniques for theft
Some people believe the reason for no major attack on wallets in the last year, is because hackers are preparing new malwares which can potentially infect Bitcoins.
There are a few things, which have made Bitcoin widely popular; the ease of transaction and financial privacy which is offered. While some businesses have started accepting Bitcoin payments with IBM leading the way.
But are these benefits enough? One morning you could wake up and find that Bitcoins have been stolen from your wallet.
Are debt investments better than Bitcoin Investment?
If you have always liked investing in debt instruments you would have seen that the returns on investments are decreasing. There might be a time when you may have to pay the bank via negative interest rates and bank charges.
I recall a famous scene from The Magnificent Seven, whereby the peasants were interacting and discussing whether they should resist the thievery of the Mexican bandit and his gang. One peasant voted against this, citing they never steal all the corn.
If your bank fails you might have to give up 20-30% of your savings voluntarily to cover the mismanagement even though it’s not your fault. This can go up to 90% as was the case in Spain, when a bank failed; bank stocks were offered in lieu of money, the stocks became worthless.
There has been a change made by the regulatory authorities, which have removed the guarantee clause which protected principal investments in money markets.
In 2010, there was a vote in the Securities and Exchange Commission (SEC) to authorise the legal suspension of money market instruments. It was cleared 4-1 by the SEC. They said they understood, that it would be hard on investors who relied on the ability to redeem shares.
As history has shown with the Tulip Bubble* being the greatest example, assets without fundamental backing have always come down. Also, history has showed us that sooner or later the people who have control over all the investments (in this case Bitcoin wallets) will try at least to obtain a part of this investment through unfair means. This could be imposing extra charges, crediting less quantity or the entire wallet being stolen.
Be it Berkshire’s Warren Buffet or JP Morgan’s CEO James Dimon, both always believed that an asset with physical backing such as: gold, equities, debt etc are always going to be safer than Bitcoins. Not only is the risk involved lesser in these securities because these assets cannot get stolen easily unlike Bitcoin. But, also because even after a price crash, the aforementioned have a greater probability of surviving than Bitcoins which has no fundamental value.
In the end it is clear, that Bitcoins prove to be a riskier investment and it’s your decision whether to go with Bitcoin investment or not.
About the author: Harneet Bahri is an engineer and MBA graduate. He has worked with various banks, advising clients with investment decisions for their portfolio. At present, he works with SAMT AG, an asset management company in Switzerland.