What are the risks of buying Bitcoin

Buying Bitcoin comes with many advantages. But it also involves more risks than simply watching the price fall. I have already explained some disadvantages, but in this article I want to focus specifically on the risks, which are not the same thing.

The good news is that many of these risks can be reduced with a few basic measures. The bad news is that they cannot be eliminated completely.

That is why it is better to know them before buying, not afterwards, when the problem may already have appeared.

Market risks: price and volatility

This is a highly volatile asset. That makes it risky in itself. High returns do not come from nowhere.

Bitcoin can experience very sharp rises and falls. A purchase made after a period of widespread euphoria can take years -or at least months- to recover its price.

That is why the main mistake is investing money you will need soon. This is a medium- or long-term investment, especially if you are not actively monitoring it and do not know the asset well. If you have to sell during a drop to pay an expense, you will lose money. So the amount you invest should be separate from your emergency fund and fixed expenses.

There is also concentration risk. Even if Bitcoin seems like a good investment to you, putting too large a share of your wealth into it adds another layer of risk.

The same can be said of leveraged purchases, which add another level of risk. Borrowing money to buy more BTC may sound like a good idea, but your position can be closed automatically during a drop. In other words, you can lose all the security you posted (collateral, as it is called here) to obtain the loan. For someone who is just starting out, leverage is not an option.

Custody risks and loss of access to funds

If you leave your bitcoins on an exchange, you depend on the company, which can:

Suffer an attack.
Lock your account.
Go bankrupt.
Temporarily or permanently restrict withdrawals.

That is why choosing a regulated provider -there are considerably fewer after MiCA- with solid finances reduces the risk, but does not eliminate it.

Remember: not your keys, not your coin.

With your own wallet , this risk disappears, but personal custody risk (or self-custody) appears. Losing your seed phrase, storing it somewhere insecure or giving it to a fake website can mean losing the funds permanently.

The devices can also fail. That is why the recovery backup is more important than the hardware wallet itself. If the device breaks and you still have the seed phrase, you can recover access to your funds.

But devices can also be hacked, so good entropy and a suitable passphrase can save you here. Yes, these are advanced concepts from the crypto world.

Scams and platform risks

An important point: the most common scams do not attack Bitcoin or the blockchain -which has never been hacked, in case you were wondering-; they attack the user..

How do they do it?

Like this:

Fake investors on social media promoting the latest memecoin.
Platforms that promise guaranteed returns.
Impersonation by fake customer-support agents for major protocols, with messages asking for your seed phrase (phishing)).
Physical letters from the brand of the hardware wallet you bought may arrive at your home. This happens because the company suffered a data breach. The funds in your wallet are safe; the physical delivery data the company held about you are not.

So be absolutely clear about this: nobody -and when I say nobody, I mean nobody- needs your seed phrase to help you. If a person or website asks for it, they are trying to take control of your wallet.

Likewise, you should never install remote-access software because a supposed technician asks you to. It is malware 100% of the time.

Risk of buying a different product from the one you think you are buying

If you buy an ETF or similar product, you are NOT buying bitcoin.

If you buy wrapped bitcoin, such as wBTC or cbBTC, you are NOT buying native bitcoin.

If you want to put capital into Bitcoin, you need to understand the difference between each option before doing so, because the conditions and how they work vary considerably.

Regulatory risk

There is a possibility that your country’s government introduces new laws that affect you..

For example, the Netherlands has moved to taxing unrealized gains on cryptocurrencies. Previously, you were taxed only when you exchanged your bitcoin; now you may have to pay tax on it even if you have not sold it, when its price rises above what you paid.

This is another risk to consider and one reason many people prefer to buy BTC anonymously.

Human error risk

If you have native or wrapped bitcoin and want to move it, using the wrong address is easier than making a mistake when carrying out a transfer in the traditional financial world. There are fewer guardrails, so errors are punished more severely.

When sending funds, check the full address. Some malware changes the address copied to your clipboard. Check the first and last characters and, because some viruses exploit exactly this habit, the important thing is to make a test first -a small-value transfer- before sending the full amount.

Tax risk

For whatever reason, you may not report your Bitcoin transactions correctly for tax purposes. It is more common than it seems.

That is why it is essential to keep your transaction history. It will be useful. Poor documentation can create tax problems, especially if you use several platforms and wallets.

Next steps

Below are the next articles in the series. If you do not know much about Bitcoin, they are designed to be read in order, but each one stands on its own, so you can jump straight to whichever interests you most:

Frequently asked questions

What are the main risks of buying Bitcoin?

The main ones are volatility, losing access to your funds, scams, human error, regulatory changes and poor tax management.

Can I lose all the money I invested in Bitcoin?

Yes, especially if you use leverage, lose access to your wallet or hand your keys to a third party.

What are the risks of leaving Bitcoin on an exchange?

The exchange can suffer an attack, lock your account, restrict withdrawals or even go bankrupt.

What are the risks of keeping Bitcoin in your own wallet?

Self-custody removes your dependence on an exchange, but losing or sharing your seed phrase can make you lose the funds permanently.

Should I ever share my seed phrase?

No. Nobody needs your seed phrase to help you, and anyone who asks for it is trying to gain control of your wallet.

What are the most common Bitcoin scams?

Phishing, fake investors, platforms promising guaranteed returns and support impersonation are all common.

What happens if I send Bitcoin to the wrong address?

You can lose the funds because Bitcoin transfers do not have the same protection mechanisms as a bank transfer.

Is an ETF or wrapped Bitcoin the same as Bitcoin?

No. An ETF provides financial exposure and wrapped bitcoins represent BTC on other networks, but neither is native Bitcoin.

Does buying Bitcoin involve regulatory risk?

Yes. Laws and taxation can change and affect how bitcoin is held, sold or taxed.

Is it advisable to buy Bitcoin with leverage?

Not for someone who is just starting out. A drop can automatically close the position and cause you to lose the collateral.