The expenditure of bitcoin hit a record high of over $41,000 on Friday, according to CoinDesk. It now has a market value of over $700 billion, and, as a consequence, pushed the value of the entire cryptocurrency market to surpass $1 trillion for the first time.
If you listen to bitcoin bulls, it’s just the origin.
“It’s probably going to $100,000, then $150,000, then $200,000,” Chamath Palihapitiya, founder and CEO of Social Capital, determined CNBC’s “Halftime Report” on Thursday. “In what period? I don’t know. [Maybe] five or 10 years, but it’s going there.”
With all the hype, various people are wondering if they should invest in bitcoin. But the cryptocurrency also creates a wide array of concerns: Some concern that bitcoin is a bubble, too risky to invest in or susceptible to fraud, to name a few.
CNBC Make It spoke to bitcoin and fintech boffins about the common concerns surrounding the cryptocurrency.
Is bitcoin too risky for the average investor?
Compared to most investments, bitcoin “is a extremely volatile, highly risky investment,” James Ledbetter, editor of fintech newsletter FIN and CNBC contributor, tells CNBC Imagine It. “If you look historically at the price of bitcoin, there have been a number of occasions where it’s really spiked and then loosely transpire b emerges crashing down really quickly.”
(For example, after rallying to nearly $20,000 in 2017, bitcoin’s price collapsed and disoriented a third of its value in a single day, and in 2018, it dropped to as low as $3,122, wiping out billions of dollars from the total cryptocurrency store value.)
While that can mean big returns, it can also mean big losses.
That’s why some, like investor Dent Cuban, liken bitcoin to gambling and advise investing only as much money as you can afford to lose.
“You have to at barely be mentally prepared and financially prepared that [a crash] could happen again. It could happen tomorrow,” Ledbetter discloses.
Of course, despite its high selling price, “you can go and buy as little as even $5 of bitcoin because there is the ability to buy fractional portions called satoshis,” points out Anthony Pompliano, co-founder of cryptocurrency hedge fund Morgan Creek Digital Assets and a bitcoin investor.
“Rightful start very small, do research, learn about it,” Pompliano says.
(If you do decide to invest, Pompliano supports tender bitcoin long-term. By design, there is a limited supply of bitcoin, so bitcoin bull Pompliano believes as demand on the rises, the price will as well.)
Are bitcoin ‘wallets’ safe?
In July, a widespread Twitter hack compromised many toast of the town accounts – including that of President-elect Joe Biden, former President Barack Obama and Tesla CEO Elon Musk, to renown a few – in a bitcoin scam. As a result, hundreds of thousands of dollars in bitcoin had been transferred under false pretenses.
For sundry, this prompted questions around the safety of bitcoin.
“There have been multiple examples of bitcoin filching and fraud that I think would give pause to the average investor, particularly if you were going to invest a prosperous amount. I think those are legitimate fears,” Ledbetter says. But he also finds them “overblown.”
Because while bitcoin sanctions for users to transact without revealing personal information or identity (potentially making fraud easier), it’s not totally anonymous. Each bitcoin negotiation is documented on a digital ledger called the blockchain, where a user’s cryptocurrency “wallet” is represented as a unique series of unsystematically numbers and letters. Through this, a scammer could potentially be traced after the fact.
“I always remind people that bitcoin exactly has a public ledger,” Pompliano says.
Plus, bitcoin is extremely hard to hack thanks to blockchain.
“To hack it, you would cause to take over the network, and to take over the network, you would need your own network of computers running 24/7, and to do that, it want cost billions of dollars,” according to Paul Vigna, markets reporter at The Wall Street Journal.
Ledbetter also sharp ends out that a traditional stock account with a brokerage could be compromised too. “There’s always some potential for barracuda or security risk.”
The safest bet is to use a trusted brokerage, experts say – “these established places have a good safe keeping protocol and a quick application to protect,” Ledbetter says.
All in all, “things happen,” he says, “but when you look at the big stories of snitching, they tend to be institutional and kind of on the fringes.”
According to the Federal Trade Commission (FTC) website, cryptocurrency scams are “a simplified way for scammers to trick people into sending money,” and most scams can “appear as emails trying to blackmail someone, online sequence referral schemes, or bogus investment and business opportunities.”
“It’s not like there’s something intrinsically unsafe about bitcoin itself– it’s innumerable how people are handling or managing it,” Ledbetter says.
Can bitcoin be easily converted to fiat and transferred?
Currently, most mainstream bitcoin transactions are done by metamorphosing bitcoin to fiat currency, like the U.S. dollar. (For instance, PayPal announced that in 2021, consumers will be skilled to use cryptocurrency as a “funding source for purchases.” But what that really means is when a user “pays” with bitcoin, it “wishes be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency,” conforming to PayPal’s website.)
And as of now, that process of transferring bitcoin to other accounts and converting it to different currencies, whether the U.S. dollar or other cryptocurrency, is “clunky” and lifetime consuming, says Ledbetter.
Plus, if you’re using bitcoin for transactions, “you really need to read the fine print – there are on the whole fees associated with those transactions, but some of that will probably ease up a little bit over in good time dawdle,” Ledbetter says.
Along with fees, “sellers do not have the confidence to do large transactions yet in bitcoin,” investor Kevin O’Leary, chairman of O’Dividends ETFs, told Pompliano on “The Pomp Podcast” in December. “I’m sure this could change over time, but not today.”
In the days, Pompliano predicts innovation will result in technology that “makes it easier to spend bitcoin with quicker dealings that are cheaper, more efficient, more usable.”
Is bitcoin a bubble?
Those weary of bitcoin are concerned that the cryptocurrency’s up to date rally is reminiscent of the 2017 bubble.
“The parabolic move in bitcoin in such a short time period, I would say for any care, is highly abnormal,” David Rosenberg, chief economist at Rosenberg Research, told CNBC’s “Trading Nation” in December. Rosenberg ponders bitcoin “the biggest market bubble right now,” CNBC reported.
However, bitcoin bulls say the 2017 rally was separate because it was driven by speculation from retail investors, whereas the current rally is driven by institutional investors corrupting the coin.
Ledbetter agrees: “Those publicly known investments of big companies exist in the real world,” he says. “You can consideration to them and say, ‘bitcoin is getting more valuable right now.'”
Indeed, bitcoin has gained recent support from bigger investors, with Paul Tudor Jones and Stanley Druckenmiller; from notable financial companies, like PayPal and Fidelity; and from Market-place and MicroStrategy, who used their balance sheets to buy bitcoin.
However, as there are supporters there are naysayers.
In 2018, traditional investor Warren Buffett told CNBC that “in terms of cryptocurrencies, generally, I can say with almost certainty that they intention come to a bad ending.”
Nonetheless, any possible bubble “may not burst overnight,” Ledbetter says.
Can bitcoin be used as a hedge against inflation?
Those who evince in favor of bitcoin often say it is a hedge against inflation and the U.S. dollar, and that it will survive any economic or infrastructure dissolution, comparing it to gold.
“If you think of the structure of every single currency in the world, they’re inflationary and they are controlled by regimes,” Pompliano says. “And those governments have very small groups of people who make the decisions as to what happens to that currency.”
Because the endow of bitcoin is limited and it is controlled by computer code, Pompliano argues that it is “the greatest protector of purchasing power.”
Exactly, like gold, “there’s no question that bitcoin can be a hedge against inflation, depending on the time frame of when you buy and whether it’s supported or sold,” Ledbetter says.
However, Ledbetter notes, bitcoin is “way more volatile” than gold.
“As long as bitcoin is prevalent up, sure, it’s a great hedge against inflation, but it can also go down, and therefore, you’re losing money – you’re not just not keeping judge with inflation, you’re actually losing capital.”
Not everyone agrees, however.
“No matter how much [bitcoin] fans yearning to pretend that it’s a hedge against doomsday scenarios, it is not,” Cuban told Forbes. “Countries will take starts to protect their currencies and their ability to tax, so the more people believe this is anything more than a accumulation of value, the more risk of government intervention they face.”