Risks of virtual currencies

Nowadays, the modern world is full of technologies that alter every aspect of life, that’s why even the global economy is affected by all of these changes. Technological advancements keep on transforming business and economy. However, as people become more and more dependent on the technology and start to rely on electronic systems instead of themselves, they inevitably face some dangers that are caused by the new inventions and devices.

Risks of virtual currencies

The most significant and obvious change in economy lies in the way goods and services are exchanged these days. People no longer play an essential role in these processes – technology has created a number of substitutes for it. While virtual money, for example, have its advantages, there still exists a variety of risks when it’s used as a means of payment.

Virtual currency, for example bitcoin, makes it possible for the customers to transfer money without using banks. Virtual currency does indeed represent a value digitally, yet it is not issued by the state or central bank and it’s not declared by the government as a legal tender, in fact, it’s controller by the developer and it can be difficult to determine whether you can trust this virtual community.

The value of the virtual currency is never stable

One of the things that make virtual money an unreliable currency is the fact that its value constantly fluctuates. The value of virtual currency depends on a variety of factors and markets, which means it’s unpredictable and unstable. You can never count on virtual currency to be worth the same tomorrow as is is today – it changes rapidly based on certain occurrences and situations. Volatile price is mostly determined by the supply and demand – the more bitcoins are bought, the more its price increases. For instance, bitcoin is performing very strong at the moment, as its value increased sharply on August 6 and reached a record high price of almost $3500 over the week. However, you have to be able and willing to lose the amount of money that you invest, because the value of this currency may fall dramatically – the price tends to increase very steeply in a short period of time and then drop strongly any day.

Possible thefts and scams

Virtual currency holders encounter a variety of risks related to scams, since it’s so prone to cyberattacks. Virtual currency platforms aren’t regulated by government and the currencies itself are stored on a digital platforms. The only protection a digital wallet has is a password which means that it’s very possible for hackers to obtain these passwords. There are some examples of hacks and thefts that resulted in the loss of bitcoins held by users. Exchange platform based in Hong Kong Bitfinex, which is considered to be one of the world’s largest dollar-based exchange for bitcoin, has experienced a major theft in 2016 – hackers managed to steal 78 million dollars from users’ wallets which also caused the value of the currency to drop 20%. Moreover, as bitcoin gains popularity, the risk of frauds and scams increases. Transactions of virtual currencies can be untraceable and hide any sort of identity, which can be used for criminal activities. That’s why scammers with deceitful intentions might use an opportunity to trick people by promising them false offers. Virtual currency lacks regulations and isn’t widely acknowledged, therefore cannot be called a truly advanced system in general.

Risk of losing money

Knowing that digital currencies aren't regulated by country’s central bank or acknowledged by the government there’s also an issue with consumer protection. Using exchange platforms can possibly result in losing the money, but the main difference between virtual currencies and the government-issued ones is that digital currency holders aren’t protected by the bank or debit/credit card provider and have fewer possibility to get their money back if something goes wrong. In cases where digital exchange platforms experience failures of scheme, hacks or go out of business, clients aren’t entitled to compensation, they aren’t promised any refund rights and can’t expect their losses to be covered or payments to be reversed. These platforms are not banks – that’s why consumers should be aware of the fact that the possibility to lose money always exists.

Risk that company will go bankrupt

One way or another, security issues remain a problem when it comes to virtual currency security. That’s why volatility of the price is not the only thing that makes it an unreliable system – holding virtual currency might cause systemic financial risks. If there are any major changes, fails, hacks or problems with the exchange platform, company may not be able to continue operating its business and go bankrupt. For example, in 2014 Mt. Gox – which once was the world’s largest exchange for bitcoin digital currency and handled 70% of all Bitcoin transactions – filed for bankruptcy after they lost approximately 850 000 bitcoins that were worth about 460 million dollars because of the possible hacking. Cases like these prove that virtual currency can create considerable financial risks to its holders, as there is no guarantee that the users will get their virtual currencies back.

Other cases of lost virtual currency

  • One of the interesting examples of lost virtual currency concerns James Howells: in 2009 he obtained 7500 bitcoins which didn’t cost him much and weren’t worth a lot back then. After accidentally damaging his computer, Howells only kept some parts of the device. For three years he didn’t use the hard drive containing his private key to the collected bitcoins and decided to throw it away. Only later did he remember that he was storing virtual currency in the hard drive and realised that it would have been worth over 9 million at that time. Though he attempted looking for the computer hard drive at a landfill site, there was no chance in finding it as it was already buried under tons of rubbish.
  • In 2011, one of the Bitcoin users, Allinvain, lost 25000 bitcoins when it was stolen from him and transferred to the untraceable user’s account. This case in particular received so much attention, because the mentioned user was one of the first ones to experience such a major loss, since the stolen bitcoins were worth about 500 000 dollars that year.
  • There are more examples of the companies who had no choice but to file for bankruptcy after losing money because of the hacker attacks. Flexcoin lost only about 600 000 dollars: it doesn’t seem like that big of a deal, compared to Mt. Gox’s enormous loss, yet the company stated that it was simply unable to recover from this loss, as it was robbed of all its resources and all of the coins in the hot wallet.
  • A digital wallet is inaccessible without the private key, which also leads to a lot of virtual currencies being lost under other circumstances than hacks or scams. For example, what happens with the bitcoins if the owner dies? Bitcoin wallet security prevents anyone else, even family members and friends, to gain access to virtual currency. Preparing another person to gain access to the digital wallet can cause some security issues, that’s why virtually currency holders aren’t advised to write down their keys and password. However, unless the user plans for it, the value in his or her wallet dies with him.

A development of economy and money, in general, has brought people a wide range of payment systems, which actually caused exchanging money to become a more reliable and practical matter. And even though transactions in virtual currencies might provide more financial privacy and be more convenient and cheaper, as virtual world expands, there comes a need to become more responsible for your own security and make decisions wisely before you get involved.

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