Heads up: This article was commissioned as a part of the Adam Rush Project. It was an experiment I did a few years ago to see if having books written by ghostwriters would be commercially viable. It wasn't. That said, the following article was written by someone else and not yet edited to my standards. I hope to find time to rewrite it myself in the future, but for now, read with caution.
Disclaimer: In this article, I discuss financial topics. These are my personal thoughts and opinions. I am not a financial advisor, and none of what you read here is financial advice.
Since its inception, bitcoin has found itself in the midst of numerous debates and controversies. Its lack of oversight by any central authority and absence of government tracking have rendered it a magnet for illicit activities. It has thus earned a reputation as the favored currency for drug peddlers, money launderers, and a host of other nefarious actors lurking in the obscure regions of the internet. This has spurred many global governments to prohibit its use within their borders.
The tarnished image of bitcoin can be largely attributed to Dark Web platforms like the infamous Silk Road. These clandestine online spaces are known for hosting a range of illegal activities, where bitcoin often serves as the preferred currency. Other cryptocurrencies have indeed begun to gain traction in these shadowy online recesses, yet none have matched bitcoin’s popularity to date.
The absence of regulatory oversight for bitcoin implies that governments cannot tax income accumulated in the form of bitcoins. While brick-and-mortar stores and e-commerce platforms accepting bitcoin payments can report their revenue, individuals have the potential to obscure bitcoin income from the authorities. For this reason, coupled with legal concerns, governments tend to dissuade citizens from using bitcoin and its digital counterparts.
Despite the lack of widespread adoption for physical transactions, bitcoin has already found use in conducting illicit business. One such prominent instance is the unregulated drug market, which currently thrives, unimpeded, under the cover of the bitcoin phenomenon.
Risks of Bitcoin Mining
Bitcoin is often praised for its versatility, yet it’s essential to recognize the potential risks associated with bitcoin mining:
Uncertainty factor: Despite showcasing impressive annual returns since its inception in 2009, the reality remains that bitcoin is a nascent phenomenon. Its future as an accepted mainstream currency or a forgotten relic is yet unclear. This uncertainty manifests itself most clearly in the volatility of its market value.
Regulatory risks: A paramount risk connected to bitcoin’s viability, both as an investment instrument and a currency, is embodied in the sphere of regulation. The imposition of stringent regulatory controls on bitcoin by a country with a large population could trigger a sharp decline in its value. Any unfavorable shift in regulatory stance can have a direct and significant impact on bitcoin investment worldwide.
Scalability issues: A further risk in transacting with bitcoin is the network participants’ reluctance to agree on a solution to address scalability challenges. For the blockchain to flourish, bitcoin must be capable of processing transaction volumes significantly higher than its current capacity. Moreover, it must do so with greater speed. At present, bitcoin transactions take approximately twenty to forty minutes, which while suitable for global money transfers, proves impractical for daily transactions such as purchasing a cup of coffee.
Is Bitcoin a Scam?
Despite bitcoin not being inherently a Ponzi scheme, the prevalence of scams associated with it continues to escalate. These deceptive practices can take numerous forms, including malware attacks, phishing attempts, fraudulent exchange schemes, and pyramid stratagems. The bait is frequently bitcoin, luring individuals to download harmful malware that can jeopardize their computer systems.
Phishing scams are a common menace in the bitcoin realm. Typically, these scams appear on social media sites where fraudsters pose as legitimate cryptocurrency brands to earn your trust. These phishing websites may provide a search form, urging users to input their private keys to verify their existence in the database. As soon as the key is entered, it’s phished, granting the scammer immediate access to the victim’s bitcoin wallet.
A further rampant deception involves bitcoin flipping scams, which pledge to instantly swap your bitcoins for cash at seemingly fantastic exchange rates. Often, these scams require an upfront fee, promising the initial investment will double almost instantaneously. In reality, these con artists simply abscond with your bitcoins, vanishing into the depths of the internet.
Lastly, the most pervasive type of bitcoin scams are the pyramid schemes. These are challenging to detect, but the outcome is invariably the same: the scammer gains unfettered access to your wallet and bitcoin holdings.
Money Laundering with Bitcoin
Despite the public nature of bitcoin transactions, there exist a number of tools designed to obscure the original source of the coins. One such tool is a “Mixer,” which amalgamates the ill-gained coins with those of other users. The coins are then funneled to a central address before being redistributed, rendering them exceedingly difficult to trace.
Coin tumblers represent another method used to convolute the trail of coins. Typically, a tumbler shuffles coins among several users, distributing multiple transactions of varying amounts to confound any tracking attempts. In doing so, they also strive to mimic genuine network-based transactions. When a Bitcoin is dispatched to a tumbler, it may result in the money launderer receiving multiple, relatively smaller transactions within a short timespan. The returned bitcoins are then further combined, divided, and transacted numerous times. These coin laundering services can easily be found with a simple internet search. Many embody a blend of various concepts, often defining themselves as privacy-preserving anonymizers. Whether they are exploited for criminal purposes or as a shield against authoritarian governments is ultimately at the discretion of the users. Indeed, liberty can be a risky proposition, and it’s precisely this liberty that bitcoin offers.
Will Bitcoin Crash?
One of the most substantial risks linked to bitcoin trading is the prospect of a Bitcoin crash. Like any high-yield investment, bitcoin values are prone to fluctuation. As its rates pivot around the transaction volume between buying and selling, it exhibits pronounced sensitivity to news. As reported by the Consumer Financial Protection Bureau (CFPB), in 2013, the average bitcoin price plummeted by 61% in just a single day.
Another noteworthy concern is the potential devaluation if bitcoin acceptance diminishes. The value of Bitcoin escalates as more individuals use it; conversely, if usage wanes and it is abandoned as a currency, its worth could plummet to insignificance. While bitcoin presently holds the crown in the realm of cryptocurrencies, it faces stiff competition. If a superior cryptocurrency emerges, it could pose a substantial threat to bitcoin’s supremacy.
What if Governments Ban Bitcoin?
While bitcoin has largely been embraced worldwide, certain nations express apprehension towards cryptocurrencies due to their volatility, decentralized nature, potential disruption to existing monetary systems, and associations with illicit activities such as money laundering and drug trafficking. Some countries have unequivocally outlawed digital currencies, while others have severed any links to established financial infrastructures. Presently, countries including China, Saudi Arabia, and Qatar have imposed an outright ban on the usage of bitcoin.
Bitcoin and Taxes
Presently, it’s reasonable to consider the trading of bitcoins akin to conducting a business, and as with any business, income tax is typically levied on profits. Many countries, however, have yet to establish definitive guidelines concerning the taxation of cryptocurrencies. There’s ongoing debate about whether cryptocurrencies should be classified as investment assets or currency. Should they be deemed investments, capital gains taxes would likely apply. Conversely, if cryptocurrencies are classified as currency, they arguably should not be subject to taxation, much like your cash holdings.
Bitcoin and Gambling
Numerous online gambling platforms have started accepting bitcoin. While their operations are based on fiat currencies, they now welcome cryptocurrency payments. The primary concern with online casinos accepting bitcoin lies in the potential disconnect between the perceived value of traditional currency and that of bitcoin. Users might not fully comprehend the magnitude of their wagers due to this differential in value perception.
Bitcoin Security
While the technology underpinning Bitcoin is secure, bitcoin exchanges cannot guarantee the same degree of protection as traditional banking institutions.
Firstly, these exchanges often provide minimal, if any, insurance protection for your account in the event of their insolvency or a breach by hackers. A prime example of this vulnerability was the infamous Mt. Gox exchange, which fell prey to a significant hack.
Moreover, Bitcoin does not possess the same legal status as conventional currencies, leaving many authorities at a loss regarding the appropriate response to theft. Although some larger entities have succeeded in reimbursing customer funds following substantial thefts, there exists no legal obligation compelling them to do so.
Furthermore, should your personal bitcoin holdings be stolen due to a security breach, there are no guarantees regarding the recovery of your funds.
Identity Theft
Each time you furnish a merchant with your credit card information, you inadvertently grant them access to your full line of credit, regardless of the transaction’s modest size. This is because most credit cards operate on a “pull” system, where the store triggers the payment and draws the designated amount from your account. Bitcoin, however, uses a contrasting “push” approach that permits the user to transmit precisely the amount of data they wish to share with the recipient. This method ensures no surplus information is dispatched, thereby offering enhanced protection against identity theft.
Summary
- As Bitcoin represents a relatively recent innovation, it carries a multitude of inherent risks.
- The decentralized nature of cryptocurrencies renders them challenging to regulate, leaving governments grappling with suitable approaches to cryptocurrency oversight.
- Bitcoin is often exploited by criminals to execute scams, launder money, and conduct theft.
- Owing to its uncertain future, Bitcoin’s volatility remains high, making it a potentially risky asset to hold.