The risks of using Bitcoin

[Kimberl2020]

There are five risks in the use of Bitcoin:

• The risk of Policy
  From a macroeconomic perspective, due to the “constant total amount” of Bitcoin, its circulation will be accompanied by the flow of goods and services, which has a small transmission effect on inflation. Adding the weight of Bitcoin to the world currency can weaken the transmission effect of monetary policy.
  
  1) Bitcoin breaks the central bank's monopoly on currency issuance. Due to its technological complexity, innovation and global nature, it is difficult for the central bank to monopolize its issuance rights.
  
  2) Cash in circulation or deposits in the banking system may be replaced by Bitcoin, which will have an impact on the base currency and currency multiplier; in addition, the existence of Bitcoin has an impact on the speed of currency circulation and its price level.
  
  3) The global nature of Bitcoin obscures the national boundaries that restrict the use of currency, and it is difficult for a country's monetary policy to isolate the influence of other countries' economies and policies.
   
  The central bank will introduce policies from various aspects to suppress Bitcoin, so as not to affect its monetary policy.
  
  
• The risk of the law
  
  In August 2013, Germany announced the recognition of the legal status of Bitcoin and it has been included in the national regulatory system. Germany is the first country in the world to recognize the legal status of Bitcoin.
  In May 2016, Japan approved the digital currency regulation bill for the first time and defined it as property.
  On June 9, 2021, the El Salvadoran government passed a bill to make Bitcoin a legal tender here. From September 7th, it will become the country's legal tender. El Salvador will become the first country in the world to use Bitcoin as a legal tender.
  
  At present, Bitcoin is only protected by the laws of various countries as a virtual commodity rather than a currency.
  
  Only a few countries recognize this status of Bitcoin and do not support it as a major currency.
  
  In cross-border Bitcoin infringement cases, because countries have different legislations on Bitcoin and have different characterizations of Bitcoin, the resolution of related disputes involving Bitcoin is relatively lagging.
  

• The risk of Speculation
  Bitcoin does not have national credit or physical assets as protection, and the price may fluctuate sharply, which is extremely risky for investors. However, in my opinion, speculation is a high risk but also an opportunity, and it depends on the individual.
  
  
• The risk of  Money laundering
  Bitcoin has the characteristics of anonymity and freedom from geographical restrictions. The flow of funds is difficult to monitor, and it will be very easy to circumvent government supervision, making it easy for criminals to conceal the source and direction of their funds, which provides convenience for money laundering, terrorist financing and evasion of sanctions .
  
  They buy other people’s bitcoins through the exchange platform, and then bring the bitcoins to other platforms or their own wallets. Through multiple transfers, the tracking path is difficult or directly impossible to trace, and then through overseas trading platforms or black markets or directly Commodities purchased overseas are exchanged for foreign currency to complete a series of acts such as money laundering.
  

• The risk of Substitution

    Bitcoin still has shortcomings such as lack of credit guarantee, poor security performance, and easy to cause deflation. At the same time, it has to face the competition of various emerging altcoins, and there is a greater
   risk of substitution! Although I think this possibility is very small.

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[Mcphail]

• The risk of Policy
  
• The risk of the law
  

• The risk of Substitution

This is a systematic risk, and it is difficult for individuals to avoid it.

• The risk of Speculation
  
• The risk of  Money laundering
  

We can control these two risks ourselves. This is not all risks, you are right, but also opportunities. Investors can profit from it.

[amishmanish]

Thanks Kimberl for taking the time and effort to elaborate on "Risk analysis" that i suggested you should write a different post about.

Any sort of Risk analysis is a pretty professional endeavor and you will find MBA graduates doing it for companies and products. The benefit of this forum is that we can crowd-source information and opinions. Still, it is important to recognize the sources from which we derive that information and give due credit to the ideas. Accordingly, it'll be great if you can elaborate on the sources from where the "Risks for Bitcoin" thought has been inspired (It could even be originally your own post, i just want to be sure).

Additionally, there is lot of factual information in this post. (Like the regulatory status of Bitcoin in Germany, Japan and the years when that happened). I request that you put some references there too.

I don't get what Risk of Policy though. From the post it seems you are talking about a lack of the traditional fiscal and monetary policy as well as there not being any governing body to implement the same. That is more like a feature of Bitcoin rather than risk.

About "Risk of substitution", I doubt that it is possible to create the same, genuinely cypherpunk  circumstances that lead to the initial community of brilliant OGs building up Bitcoin. Satoshi leaving behind a stack of One million untouched. Nick Szabo giving away 10,000 BTC to buy Pizza. I don't think the same natural and genuine community can ever form again now that cryptocurrency has become de-facto money. Do you imagine any of these "Teams and advisors" you see on seemingly genuine crypto projects would give away millions in the hope of adoption and education. I don't think so.

This is why, the risk of substitution does not seem a risk at all to me. Looking forward to your and others' opinion on this.

PS: You can always edit the OP to update the formatting or provide references and credit like i mentioned.

EDIT & PS: I would love to know more about the experience of having an actual outlet where you tried crypto payments.

[Tigerheart3026]

in my view, here the 3 risks very higher and even the government is not approving bitcoin because of these few cases government is worrying in money laundering will uncontrollable if it’s legal.

we users risks, using btc it’s the breaking of laws. the government has made provision for punishment here, especially in my country, new laws are being enacted to prevent its use.

[dzonikg28]

• The risk of Policy
  
• The risk of the law
  

• The risk of Substitution

This is a systematic risk, and it is difficult for individuals to avoid it.

• The risk of Speculation
  
• The risk of  Money laundering
  

We can control these two risks ourselves. This is not all risks, you are right, but also opportunities. Investors can profit from it.

The risk of advancements in technology to crack cryptography is probably another one. I don't know how severe that problem is and people say the algorithm could quickly be adapted, but if somebody cracks the algorithm I doubt that will ever become public knowledge until the harm done is really extraordinarily big. There are a couple of threads discussing the influence of quantum computing with pros and cons, but assuming that Bitcoin's algorithm might stay strong forever may also be naive to believe. [/list]

[ChiBitCTy]

I think that some of these risks are a bit overblown, some are certainly true and some I don't think are as much risks as they are issues for governments.  I think the biggest risk for bitcoin, and other cryptocurrencies for that matter , is the risk of loss.  There are far too many people "in bitcoin" that have much of or most of their life savings inside it.  This is not the proper way to "invest" , or "store" bitcoin..you need a well rounded portfolio at all times.  To me, that is it's biggest risk.

[elda34b]

The risk of advancements in technology to crack cryptography is probably another one. I don't know how severe that problem is and people say the algorithm could quickly be adapted, but if somebody cracks the algorithm I doubt that will ever become public knowledge until the harm done is really extraordinarily big.

If that does happen, crypto is probably the last that will get affected. The algorithm is used by others such as banking etc, and cracking crypto might not be as profitable as social engineering, doing ransomware, etc. Which is why most attack happens through spam e-mail, phishing link, etc.

[Tessnik]

The risk of security as you stated to me is overrated because bitcoin transaction is highly secured as long as the user has access to the wallet, the blockchain has the most secured security system which even the government can’t tamper with that is why the decentralized nature of bitcoin made bitcoin regulation by government impossible.

[Kakmakr]

I think a lot of people are putting too much emphasis on the risks involved with governments and regulations. In most countries, governments are chosen by the people through a voting system. If you are lucky enough to live in one of these countries, then you have a say in what happens.

Use your vote and the votes of your family and friends to vote for a government that can bring change that favor Crypto currencies. The older generation will vote for "Fiat" based governments, because they accepted that as the norm. The younger generation wants change and they want more effective currencies and technologies... so go out and get the votes of these people to make Crypto currencies the new standard. 

[oHnK]

Of all the risks written by the op, the one I'm most worried about is speculative risk, which in my opinion, often happens like a bubble because of issues created by whales.  At this time, the market is still very new to dealing with sensitive issues so that prices often go up and down until the difference is very large.  Sometimes the government and the market are not much different.  If you follow the market, then who has the most money will have a big influence in the market so it will be easy to create issues that will increase profits.

[Smartvirus]

From a macroeconomic perspective, due to the “constant total amount” of Bitcoin, its circulation will be accompanied by the flow of goods and services, which has a small transmission effect on inflation. Adding the weight of Bitcoin to the world currency can weaken the transmission effect of monetary policy.

I am deep in thoughts on this. Bitcoin having an effect on inflation either small or not, is it a good thing or a bad thing?

Use your vote and the votes of your family and friends to vote for a government that can bring change that favor Crypto currencies. The older generation will vote for "Fiat" based governments, because they accepted that as the norm. The younger generation wants change and they want more effective currencies and technologies... so go out and get the votes of these people to make Crypto currencies the new standard.  

On this, you can't blame the people that much, not like your blaming them though but, the youths are barely given a chance to actively participate in politics. Thats with regards to aspiring for some of the top offices. Not because there is a policy that hinders them from doing so or they dont have enough resources but, somehow, the party system gives more emphasises to aged members of the party and are more likely to project them as flag bearers than the youths.

[hugeblack]

The greatest danger can be in the ignorance of many in the current financial system and considering Bitcoin as a means of quick profit, and therefore all they care about is the price aspect apart from all the other advantages that this technology provides.
The rest of these risks will diminish over time and within 10 years the risk of securing the private key/seed will remain the biggest problem.

[avikz]

I only consider the risk of policy and law are the real risks of using bitcoin for a common people like us! The other risks are not really risks per say. It's just that the crypto ecosystem is still at a nascent stage. So we probably will see more robust framework to encounter such risks and eventually mitigate them.

But the government policy or law is the real challenge where we don't have any real control. We are simply at a mercy of the politicians and beaurocrats. Other risks are manageable while the first two are not!

[Imran232]

• The risk of Policy
  
• The risk of the law
  

• The risk of Substitution

This is a systematic risk, and it is difficult for individuals to avoid it.

• The risk of Speculation
  
• The risk of  Money laundering
  

We can control these two risks ourselves. This is not all risks, you are right, but also opportunities. Investors can profit from it.

First of all though i don't have lots of technical knowledge because i am a student of accounting subject. And just studying at undergraduate position. Now the main thing what government aware the biggest risk factor in bitcoin which was money laundering Through bitcoin. Now my question is if bitcoin is banned in any country how they buy huge amount of bitcoin well its not possible in online p2p site reason no one will trust someone for a huge amount. Or if how he payment obviously if amount is big then obviously through bank account then if he done any biggest transaction Through bank account then obviously bank will hold the transaction until knowing the reason. Heres how he got caught. Then second way Through Through black market if a person know about black market then i don't think so is it matter of dose he had bitcoin or not he can laundering he money any way. Then another one is swissbank. Well i don't have any knowledge about it too. Well i don't think so for money launder is it matter bitcoin any law risk of their country.

Main thing is if government approved btc then they can more monitoring the btc activity of their country. Otherwise law will be just a colum for government law book. Its won't matter for anyone.[/list]

[glendall]

In the case of the risk that you describe, the risk of money laundering is what is considered by every country not to legalize bitcoin until now, because it is true that if bitcoin was legalized, many officials and rich people manipulated their wealth by investing in bitcoin in addition to money laundering.

[yhiaali3]

Of course, there are risks in using Bitcoin, like any other monetary system. There are great risks and benefits. The first of these risks, in my opinion, is sharp fluctuations in prices, but this can have two sides. There can be loss, but also there can be high profits, also there are risks in laundering Funds move money across borders easily and this causes great concern to all governments.
As for the rest of the risks that you talk about, they are a source of concern for governments and central banks, not for ordinary people. On the contrary, they can be considered advantages and not risks. Therefore, by comparison between the risks and benefits in using Bitcoin, we find that the benefits or features in using Bitcoin are very large and overcome any other monetary system, especially These risks can sometimes be overcome or bypassed, and this makes Bitcoin superior to all existing monetary systems.

[Chato1977]

actually this is a general statement and not only be addressed in Bitcoin but the Whole cryptocurrencies .

meaning that the risk is in every coin we will be investing .

In the case of the risk that you describe, the risk of money laundering is what is considered by every country not to legalize bitcoin until now, because it is true that if bitcoin was legalized, many officials and rich people manipulated their wealth by investing in bitcoin in addition to money laundering.

yes that is one fact that laundering is what the reason why government is trying to hinder total adoption of this currencies.

[Darker45]

The degree of the risks that you mentioned was much higher before than today. And if Bitcoin was able to reach the mainstream amidst those higher risks in the past, then it could be more easily adopted now. It is obvious that Bitcoin is now more acknowledged as a financial alternative, whether an asset or a currency, than as a rogue currency in the past.

Also, it seems Bitcoin cannot be made to bow down to policies and laws. There are countries which treat Bitcoin as a sort of an enemy like Nigeria. But notice how Bitcoin even thrives more in those areas.

[Kimberl2020]

Of all the risks written by the op, the one I'm most worried about is speculative risk, which in my opinion, often happens like a bubble because of issues created by whales.  At this time, the market is still very new to dealing with sensitive issues so that prices often go up and down until the difference is very large.  Sometimes the government and the market are not much different.  If you follow the market, then who has the most money will have a big influence in the market so it will be easy to create issues that will increase profits.

Thank you for your reply. Investment risks are great for individuals, but you can choose investment methods to deal with them.

[Kimberl2020]

I only consider the risk of policy and law are the real risks of using bitcoin for a common people like us! The other risks are not really risks per say. It's just that the crypto ecosystem is still at a nascent stage. So we probably will see more robust framework to encounter such risks and eventually mitigate them.

But the government policy or law is the real challenge where we don't have any real control. We are simply at a mercy of the politicians and beaurocrats. Other risks are manageable while the first two are not!

Yes, I agree with you. You added what I wanted to express.