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Just like a commodity it is easy to buy and sell bitcoins. Current value is so much higher then it was just a few months ago it seems like a really great investment. Especially when you consider that there is a limited supply, and if bitcoins are widely adopted then the value could go up substantially.

However, looks can be deceiving in any investment, so what are some of the risks?

  • 3
    I would remove the "And would you recommend that an average person invest in bitcoin?" we are not Personal Finance, and this seems more like a debate or discussion. IT is fine to ask for an explanation of the risk, or maybe for data on who invests (do experts invest?) but it doesn't make sense to ask the forum on their recomendation. – Artem Kaznatcheev Sep 2 '11 at 0:11
  • Okay fair enough, removed. But it's an important issue, so I'm a little surprised to see people voting it down. – Joshua Kolden Sep 2 '11 at 1:06
  • Since you removed the contentious line, I removed my downvote. – Artem Kaznatcheev Sep 2 '11 at 1:15
  • As modified, it's a good question, IMO. – David Schwartz Sep 2 '11 at 2:10
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Volatility: The price of Bitcoins is fairly unpredictable. A speculator is basically trying to predict the future price of Bitcoins.

Security: A speculator generally has to trust his Bitcoins and currencies to an exchange, at least some of the time. That exchange could disappear or claim he transferred out his Bitcoins. When his Bitcoins are not in an exchange he has to store them in a wallet which is vulnerable to compromise.

Technology: Bitcoins could become obsolete overnight if some new, superior crypto-currency came out. This could start as a sharp drop faster than a speculator can react. He would then have to either take a big loss or risk a total loss.

Unknown Defect: There has already been one case where a software defect in the client forced the unwinding of many transactions. What other problems might pop up one day and negatively impact the speculator either directly (by causing him to lose Bitcoins) or indirectly (by causing his coins to lose value)?

Known Defect: A 51% attack, double-spend attack, or similar problem could cause the Bitcoin system to become unstable or could impact the speculator's transactions directly.

Legal: The legal status of Bitcoin trades and the tax implications are in many cases unknown and in all cases subject to change, particularly if Bitcoins become popular.

Physical: Since Bitcoins can be easily moved halfway around the world and are untraceable, if someone knows you hold a lot of Bitcoins, he could kidnap/rob you and physically compel you to transfer your entire stash of Bitcoins to him. This is much less traceable than currencies, and you may have a very hard time getting police to take you seriously. (You couldn't even prove that you had lost the coins as opposed to having transferred them to another wallet you control.)

Mistake: A speculator could make a typing mistake, especially while making a large number of transactions of different kinds, that results in a loss. A price or quantity could be entered incorrectly or someone else's Bitcoin address could be given as a destination for a withdrawal.

  • Mistake: The likelyhood of putting in a wrong address is very low. If the address is incorrect then the transaction is refused (digits work as a checksum). The statistical probability in this is incomprehensibly. The wrong amount is much more likely. – MaxSan Sep 2 '11 at 16:03
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    I mean a wrong, but valid, address. For example, many exchanges give you one-time deposit addresses. If you deposit to them twice, the second deposit is not credited. You could also cut/paste someone else's address instead of your own. I agree though, an incorrect price/quantity is more likely. But there have definitely been cases of people using a wrong deposit address. (Mixing up Ixcoin/Bitcoin deposit addresses, for example.) – David Schwartz Sep 3 '11 at 1:36
  • The last point mistake is not bitcoin-specific, it can also happen with traditional banking. – mike May 8 '17 at 16:22
  • @mike True, but there is often (not always, but often) recourse to fix such mistakes in traditional banking. That is much less likely bit bitcoin. – David Schwartz May 8 '17 at 16:24
  • Yes, you can't fix mistakes in bitcoin, because the blockchain is permanent. Maybe you can update your answer to reflect this, since it is vague/wrong as it is now. – mike May 8 '17 at 16:28

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