5 Things to Watch Out for Before Jumping Into Digital Currency

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The rising price of the digital currency called BitCoins is giving non traditional currencies significant media attention.

BitCoin exchange rates have risen from a few dollars to over a thousand dollars in the span of a year. It has also gained media exposure because of the FBI takedown of the Silk Road, an anonymous marketplace where people can buy illegal substances using BitCoins. Governments are also starting to take an interest now that companies have started accepting digital forms of currencies in exchange for goods and services.

It is almost a certainty that BitCoins, or something like them, will eventually gain mass market adoption so it is a good time to start becoming familiar with the technology and perhaps even trying them out. However one must be careful by paying attention to these areas:

Most people turn regular currency into BitCoins by purchasing them on an exchange. These exchanges have been the target of hackers, and as a result, some exchanges have had significant losses. Make sure that you transfer your money to your local wallet instead of leaving it in the exchange.

Another way to obtain coins is to “mine” them which involves having your computer do many computations until you chance upon a combination that is a valid BitCoin. Many people use the graphical processing unit (GPU) on a graphics card or buy custom hardware that are able to do these calculations hundreds of time faster than on a normal computer and with a fraction of the electricity. If you decide to buy some mining hardware calculate how long it will take to break even on your hardware and electricity costs. The difficulty of finding a new coin increases as more coins are mined so your calculations must take this into account. Already the costs of using a GPU for mining make the payback period too long to be worthwhile.

Technical details aside, BitCoin is a currency whose value fluctuates against other currencies. The price can (and has) dropped drastically and liquidity (the ability to turn your investment into a more common currency) is not guaranteed. So do your research as to what price you think is fair before buying. Additionally, make sure you understand how you will turn your BitCoin investment back into cash by reading the terms of service from your chosen exchange. Similarly, BitCoin Ponzi schemes have surfaced. BitCoin is not backed by a government or insured like a bank so any investment you make is at your own risk.

Your BitCoin balance is not stored centrally. Once you have the BitCoins in a file on your computer you must understand that losing this file means you have lost your money. So password protect your computer to help prevent unauthorized people from accessing it. You also want to back up your wallet in case you have a hard drive crash.

Finally, remember that your government will have an interest in your BitCoin investing. Depending on your country your gains will likely be taxable just as if you had a gain on foreign currency or in a stock. If you do work in exchange for BitCoins your government is sure to treat that just as if it were done with a real currency. Remember that the only certainties in life are death and taxes!

It is difficult to say what the future of BitCoins will look like. Be cautious, treat it like you would any other speculative investment, and good luck!

This post comes from the team at Financial Scams, a blog focused on cataloging Internet based fraud and identity theft schemes.

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