Bitcoin risks: What you should know about the digital currency

some of it is the feeling of not being left out – being too late for the train. A classic example of this phenomenon is tulip mania during the Dutch golden age, when speculators bought tulip bulbs and expected that prices would just rise and rise. Well, they eventually crashed and there was no value to them. We can’t say whether Bitcoin will crash, but Bitcoin mania resembles tulip mania in many respects. It is very human.

Rutgers Today: How would you describe Bitcoin security, privacy and ease of use?

Lindqvist: You can buy Bitcoins or parts of Bitcoins with a credit card and create a Bitcoin wallet online. But, somewhat surprisingly, Bitcoin has gained a huge amount of value even though you can’t use it for a lot of important transactions, such as holiday shopping. While Bitcoin transactions can be secure, depending on how you store your Bitcoin wallet online and the mechanisms for protecting your wallet, Bitcoins are stolen from time to time and that’s certainly a risk for users. If you put money in the bank, you get FDIC deposit insurance, but with a digital currency like Bitcoin, you don’t have that kind of security. People typically are not liable for fraudulent credit card charges they are not responsible for. But if your Bitcoin wallet is stolen via hacking, you’ve lost your investment.

Rutgers Today: What can be done to protect Bitcoin users and keep them from getting burned?

Lindqvist: Today, what you would need to do is to establish a so-called “cold” wallet that involves, for example, printing records of your possession. Regulators are not quite sure what to do about Bitcoin, and it’s unclear how major banks and retailers will address it. In our study, we found that many Bitcoin users don’t want government regulation, but they want FDIC-like insurance. How long will Bitcoin be increasing in value? Nobody knows. Unlike farmland and other tangible things, Bitcoin does not have intrinsic value. So when it crashes, it crashes, and then you just hope you can exchange it somewhere for money. I would be surprised if Bitcoin’s value doesn’t plunge again at some point, like the stock market does now and then. On the other hand, it can then go back up again. Finally, I do believe Bitcoin and cryptocurrencies (digital currencies) will have an important role in our monetary system and our society, but it is anybody’s guess what that role ultimately will be.

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