Is Bitcoin Worth the Risk?

​I want to follow up on my recent column regarding cryptocurrencies, and for the purposes here I will call them all, Bitcoin. Given the rising popularity of this new asset I feel there are a few things people should know before making a decision. Let’s begin with how you might actually own it.
 
Bitcoin ownership is typically anonymous, which is one of its main attractions. The digital coins are tracked on a system of decentralized computers where they reside as alphanumeric codes, known only to the owner. The most confidential way to store the codes is in your personal possession such as on a piece of paper or a thumb drive. This is known as a cold wallet. Storing this way requires that you do not lose the codes. If you do, they cannot be recovered, and your coins will be lost. This happens frequently. Consider how many times you have lost a password in the past and had to have it restored. With a Bitcoin cold wallet there is no restore option.
 
Another way to hold Bitcoin is at an exchange. For many, this will feel more like an online banking experience with access by personal ID and password. If you forget the passwords, they can usually be restored. The risk however is that if the exchange is hacked, and it has happened, your crypto could be stolen and once again, lost forever. You also lose some confidentiality by using an exchange.
 
More recently Bitcoin can be invested in indirectly using a publicly traded fund. Read the prospectus carefully as you don’t actually own the coin and thus the value of your investment is based on demand for the fund. It does not move in perfect sync with Bitcoin and sometimes has varied widely. There are also annual fees that you wouldn’t pay if you held the coin personally.
 
Another significant risk to owning Bitcoin is the risk of theft. Many choose to hold their Bitcoin codes in a cold wallet as described above. One downside is, suppose a bad individual wants to steal your coin. All they need do is threaten you until you give them your codes. They can then transfer your coins to their “wallet” and since ownership is anonymous, there is no evidence the theft ever happened. Law enforcement would be helpless to solve the crime. I hear people all the time talk about owning Bitcoin. I caution as strongly as I can, if you own Bitcoin, do not talk about it. You are putting yourself and your investment at risk.
 
Given these challenges I suggest extreme caution before entering this new digital currency world. Prices are volatile and there are many risks. Some of these digital coins may eventually become mainstream as they offer real potential benefits, but this is a new and hazardous industry. Those interested should study it carefully, learn the risks, and only invest money they can afford to lose.