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What are the dangers of investing in cryptocurrency?



Like any currency, there are disadvantages associated with using Cryptocurrency:

Cryptocurrencies Are Not Widely Accepted

Cryptocurrencies are still only accepted by a very small group of online merchants. This makes it unfeasible to completely rely on Cryptocurrencies as a currency. There is also a possibility that governments might force merchants to not use Cryptocurrencies to ensure that users’ transactions can be tracked.

Wallets Can Be Lost

If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted, Cryptocurrencies have essentially been “lost”. There is nothing that can done to recover it. These coins will be forever orphaned in the system. This can bankrupt a wealthy Cryptocurrency investor within seconds with no way form of recovery. The coins the investor owned will also be permanently orphaned.

Cryptocurrency Valuation Fluctuates

The value of Cryptocurrency  is constantly fluctuating according to demand. As of June 2nd 2011, one Cryptocurrency was valued at $9.9 on a popular cryptocurrency exchange site. It was valued to be less than $1 just 6 months ago. This constant fluctuation will cause cryptocurrency accepting sites to continually change prices. It will also cause a lot of confusion if a refund for a product is being made. For example, if a t shirt was initially bought for 1.5 BTC, and returned a week later, should 1.5 BTC be returned, even though the valuation has gone up, or should the new amount (calculated according to current valuation) be sent? Which currency should BTC tied to when comparing valuation? These are still important questions that the Cryptocurrency community still has no consensus over.

No Buyer Protection

When goods are bought using Cryptocurrencies, and the seller doesn’t send the promised goods, nothing can be done to reverse the transaction. This problem can be solved using a third party escrow service like ClearCoin, but then, escrow services would assume the role of banks, which would cause Cryptocurrencies to be similar to a more traditional currency.

Risk of Unknown Technical Flaws

The Cryptocurrency system could contain unexploited flaws. As this is a fairly new system, if Cryptocurrencies were adopted widely, and a flaw was found, it could give tremendous wealth to the exploiter at the expense of destroying the Cryptocurrency economy.

Built in Deflation

Since the total number of cryptocurrencies is capped at 21 million, it will cause deflation. Each cryptocurrency will be worth more and more as the total number of cryptocurrencies maxes out. This system is designed to reward early adopters. Since each cryptocurrency will be valued higher with each passing day, the question of when to spend becomes important. This might cause spending surges which will cause the Cryptocurrency economy to fluctuate very rapidly, and unpredictably.

No Physical Form

Since cryptocurrencies do not have a physical form, it cannot be used in physical stores. It would always have to be converted to other currencies. Cards with Cryptocurrency wallet information stored in them have been proposed, but there is no consensus on a particular system. Since there would be multiple competing systems, merchants would find it unfeasible to support all Cryptocurrency cards, and therefore users would be forced to convert Cryptocurrencies anyway, unless a universal system is proposed and implemented.

No Valuation Guarantee

Since there is no central authority governing Cryptocurrencies, no one can guarantee its minimum valuation. If a large group of merchants decide to “dump” Cryptocurrencies and leave the system, its valuation will decrease greatly which will immensely hurt users who have a large amount of wealth invested in cryptocurrency. The decentralized nature of cryptocurrency is both a curse and blessing.

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