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Bitcoin and other cryptocurrencies have been getting a lot of attention lately. While some traders may make money on the change in price of bitcoin or other cryptocurrencies, economists at Charles Schwab don’t recommend them currently as an investment in portfolios, due primarily to their lack of characteristics common to other investments or asset classes – including traditional currency or cash – as well as their volatility, security, potential for future regulation and other factors.  

What are some risks of Bitcoin and cryptocurrencies?

“Financial loss. Bitcoin and other cryptocurrency prices historically have been highly volatile, and fluctuations could result in significant losses.”

“Future regulation. Cryptocurrency issuance and trading is currently not well regulated, and additional oversight and regulation in the future is likely. US Treasury Secretary Janet Yellen may be poised to curtail the use of cryptocurrencies.”

“Fraud and cybercrime. These have already occurred. Cryptocurrencies could come under scrutiny from the Financial Crimes Enforcement Network (FinCEN), for noncompliance with the Bank Secrecy Act (BSA) and anti-money laundering requirements. Bitcoin exchanges have also been subject to computer outages caused by excessive demand, and because the ledgers are held on the internet, a large-scale cyberattack could limit access in an emergency, something less likely to happen with cash or gold.”

“Theft or loss. A login ID and password is usually required to access a cryptocurrency exchange. If this is lost, hacked or stolen, access could be denied or lost. While bitcoins can be stored in physical wallets, so they can be spent without a computer, this creates the same risks as with all cash currencies: They could be lost, stolen or destroyed by accident.”

“Taxes. The IRS treats bitcoin as property, not currency. Cryptocurrency transactions are taxable by the IRS whenever a taxable event occurs, such as selling bitcoin for a fiat currency or when traded for another asset. Investors are responsible for tracking cost basis, gains and other reporting.”