Cryptocurrency  

Risks and rewards of cryptocurrency

This article is part of
Guide to bitcoin and blockchain

He outlines some of the main risks as: 

  • Volatility: Cryptocurrencies' value suffers extremely high volatility, as well as the business sustainability of the platforms which host bitcoin wallets.
  • Regulation: There's also the risk of a cryptocurrency simply discontinuing or becoming outlawed by the government.
  • Storage: Storing and ensuring your bitcoins and cryptocurrencies keys are safe is essential.
  • Criminal: Given its unregulated nature, the transactions may be more prone to fraud or scams compared to conventional transactions, and investors could also potentially become involved in transactions associated with criminal activities without knowing. Such criminal activities might be executed by organised crime or even state-driven initiatives.
  • Hacks: Once a cryptocurrency gets seriously hacked, trust will be destroyed, while value will drop to zero in minutes.

Lilian Chovin, investment strategist for Coutts, says at the "heart of the debate" as to whether cryptocurrency is an "epochal step that will transform the world of finance" or a "speculative bubble that will inevitably end in tears" is how people use this virtual currency.

She explains: "At the heart of the debate is the idea the cryptocurrency derives its value from its use as a payment system - a new and improved Visa or PayPal - and as a new form of fiat currency.

"How well it provides advantages over these may well be the defining factor in whether Bitcoin is a good investment."

Volatility 

The biggest risk is trying to time an exceptionally volatile market. Over December the prices of cryptocurrencies exploded; in January the air fizzled out of them like helium from a New Year party balloon.

People buying into them on the back of the hype and excitement in November and December will now be out of pocket because they bought at or near the top, and most of the currencies are now at or near the bottom.

In January, one Twitter user wrote: "Chatting to a barman last week, he'd dropped his entire savings on Ripple (XRP) having heard people talk about it in the pub. It's lost 67 per cent of its value since he bought in."

Dror Futter, partner at Rimon Law, fully believes the "greatest risk today" is the volatility of cryptocurrency. "It is difficult to run a business accepting cryptocurrencies when the value of the currency can drop 30 per cent in two days."

Ms Chovin adds: "On some days, if you had ordered a book in the morning, the value of the Bitcoin you used to pay for it could have fallen by a third by the time it gets delivered.

"This makes pricing items in Bitcoin a nightmare; vendors could potentially make huge losses, although some may have made huge gains. Either way, it adds a level of unpredictability to transactions."

Greg Carter, chief executive of online lending platform Growth Street, believes there are "plentiful opportunities" for the financial services sector when it comes to cryptocurrencies and blockchain technology.

However, he agrees with Ms Chovin that the "speed and efficiency promised by blockchain might end up being far less transformative in the UK market than it could be for the US".

He highlights the fact that the UK’s Faster Payments service already offers instant transactions up to a value of £250,000, while Bitcoin transactions, meanwhile, can take hours to clear, potentially leaving parties exposed to a fast-moving market.