Virtual and volatile: Is investing in bitcoin simply too risky?

'Investing in bitcoin comes with plenty of real-world risks'

clock • 4 min read

Who wouldn't want to be the next Kristoffer Koch? In 2009, the young Norwegian engineer invested $27 in a little-known virtual currency called bitcoin and promptly forgot about it. Four years later, Koch discovered that his 5,000 bitcoins were worth some $900,000.

Stored in a digital "wallet," which can be set up on your local computer or online via sites such as coinbase.com and is connected to the user's bank account, PayPal account or credit card, bitcoin users nevertheless leave a limited digital trail. Less anonymous than cash, bitcoin is a far easier way to pay very large sums and cannot be counterfeited - though it has proved vulnerable to hackers, with the wallet the typical point of entry.

Unregulated and uninsured, the total bitcoin supply belongs to its community of mostly anonymous users - whomever that happens to include at any moment in time - and is worth precisely whatever that market decides: just under $3,000 per coin as of mid-June, up from $0.005 when the lucky young Norwegian took the bitcoin plunge.

The disruptive power of blockchain for financial services firms

Except in a handful of countries - including Bolivia, Bangladesh, Ecuador and Kyrgyzstan - the use of bitcoin by private individuals is not expressly prohibited. While the European Banking Authority has advised banks not to deal in virtual currencies until a regulatory regime is in place, no specific legislation in this regard currently exists in Europe.

In China, by comparison, banks and other financial institutions are prohibited from dealing in the cryptocurrency. Nevertheless, Chinese investors have shown an especially significant appetite for bitcoin as a way to circumvent state-imposed capital controls. Today, some 80% of global bitcoin transactions are processed in that country.

Japan - where bitcoin ATMs were recently introduced - remains the only country that has officially recognized bitcoin as legal tender. Even there, however, few products or services can actually be purchased with the virtual currency.

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