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Thinking of buying bitcoin? What experts say about big crypto concerns: 'You have to be mentally prepared'

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In this photo illustration, a visual representation of the digital Cryptocurrency, Bitcoin is displayed on April 03, 2019 in Paris, France.
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After Tesla revealed in an SEC filing on Monday that it has bought $1.5 billion worth of bitcoin, the price of the cryptocurrency hit a record high of over $44,000, giving it a market value of over $800 billion.

If you listen to bitcoin bulls, it's just the beginning.

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"It's probably going to $100,000, then $150,000, then $200,000," Chamath Palihapitiya, founder and CEO of Social Capital, told CNBC's "Halftime Report" on Thursday. "In what period? I don't know. [Maybe] five or 10 years, but it's going there."

With all the hype, many people are wondering if they should invest in bitcoin. But the cryptocurrency also creates a wide array of concerns: Some worry that bitcoin is a bubble, too risky to invest in or susceptible to fraud, to name a few.

CNBC Make It spoke to bitcoin and fintech experts about the common concerns surrounding the cryptocurrency.

Is bitcoin too risky for the average investor?

Compared to most investments, bitcoin "is a highly volatile, highly risky investment," James Ledbetter, editor of fintech newsletter FIN and CNBC contributor, tells CNBC Make It. "If you look historically at the price of bitcoin, there have been a number of occasions where it's really spiked and then comes crashing down really quickly."

(For example, after rallying to nearly $20,000 in 2017, bitcoin's price collapsed and lost a third of its value in a single day, and in 2018, it dropped to as low as $3,122, wiping out billions of dollars from the total cryptocurrency market value.)

While that can mean big returns, it can also mean big losses.

That's why some, like investor Mark Cuban, liken bitcoin to gambling and advise investing only as much money as you can afford to lose.

"You have to at least be mentally prepared and financially prepared that [a crash] could happen again. It could happen tomorrow," Ledbetter says.

Of course, despite its high selling price, "you can go and buy as little as even $5 of bitcoin because there is the ability to buy fractional shares called satoshis," points out Anthony Pompliano, co-founder of cryptocurrency hedge fund Morgan Creek Digital Assets and a bitcoin investor.

"Just start very small, do research, learn about it," Pompliano says.

(If you do decide to invest, Pompliano supports holding bitcoin long-term. By design, there is a limited supply of bitcoin, so bitcoin bull Pompliano believes as demand increases, the price will as well.)

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Are bitcoin 'wallets' safe?

In July, a widespread Twitter hack compromised many celebrity accounts – including that of President-elect Joe Biden, former President Barack Obama and Tesla CEO Elon Musk, to name a few – in a bitcoin scam. As a result, hundreds of thousands of dollars in bitcoin had been transferred under false pretenses.

For many, this prompted questions around the safety of bitcoin.

"There have been multiple examples of bitcoin theft and fraud that I think would give pause to the average investor, particularly if you were going to invest a substantial amount. I think those are legitimate fears," Ledbetter says. But he also finds them "overblown."

While bitcoin allows for users to transact without revealing personal information or identity (potentially making fraud easier), it's not totally anonymous. Each bitcoin transaction is documented on a digital ledger called the blockchain, where a user's cryptocurrency "wallet" is represented as a unique series of random numbers and letters. Through this, a scammer could potentially be traced after the fact.

"I always remind people that bitcoin literally has a public ledger," Pompliano says.

Plus, bitcoin is extremely hard to hack thanks to blockchain.

"To hack it, you would have to take over the network, and to take over the network, you would need your own network of computers running 24/7, and to do that, it would cost billions of dollars," according to Paul Vigna, markets reporter at The Wall Street Journal.

Ledbetter also points out that a traditional stock account with a brokerage could be compromised too. "There's always some potential for fraud or security risk."

The safest bet is to use a trusted brokerage, experts say – "these established places have a good security protocol and a quick application to protect," Ledbetter says.

All in all, "things happen," he says, "but when you look at the big stories of theft, they tend to be institutional and kind of on the fringes."

According to the Federal Trade Commission (FTC) website, cryptocurrency scams are "a popular way for scammers to trick people into sending money," and most scams can "appear as emails trying to blackmail someone, online chain referral schemes, or bogus investment and business opportunities."

"It's not like there's something intrinsically unsafe about bitcoin itself– it's more how people are handling or managing it," Ledbetter says.

Can bitcoin be easily converted to fiat and transferred?

Currently, most mainstream bitcoin transactions are done by converting bitcoin to fiat currency, like the U.S. dollar. (For instance, PayPal announced that in 2021, consumers will be able to use cryptocurrency as a "funding source for purchases." But what that really means is when a user "pays" with bitcoin, it "will be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency," according to PayPal's website.)

And as of now, that process of transferring bitcoin to other accounts and converting it to different currencies, whether the U.S. dollar or other cryptocurrency, is "clunky" and time consuming, says Ledbetter.

Plus, if you're using bitcoin for transactions, "you really need to read the fine print – there are usually fees associated with those transactions, but some of that will probably ease up a little bit over time," Ledbetter says.

Along with fees, "sellers do not have the confidence to do large transactions yet in bitcoin," investor Kevin O'Leary, chairman of O'Shares ETFs, told Pompliano on "The Pomp Podcast" in December. "I'm sure this could change over time, but not today."

In the future, Pompliano predicts innovation will result in technology that "makes it easier to spend bitcoin with quicker transactions that are cheaper, more efficient, more usable."

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Is bitcoin a bubble?

Those weary of bitcoin are concerned that the cryptocurrency's current rally is reminiscent of the 2017 bubble.

"The parabolic move in bitcoin in such a short time period, I would say for any security, is highly abnormal," David Rosenberg, chief economist at Rosenberg Research, told CNBC's "Trading Nation" in December. Rosenberg considers bitcoin "the biggest market bubble right now," CNBC reported.

However, bitcoin bulls say the 2017 rally was different because it was driven by speculation from retail investors, whereas the current rally is driven by institutional investors buying the coin.

Ledbetter agrees: "Those publicly known investments of big companies exist in the real world," he says. "You can point to them and say, 'bitcoin is getting more valuable right now.'"

Indeed, bitcoin has gained recent support from bigger investors, like Paul Tudor Jones and Stanley Druckenmiller; from notable financial companies, like PayPal and Fidelity; and from Square and MicroStrategy, who used their balance sheets to buy bitcoin.

However, as there are supporters there are naysayers.

In 2018, legendary investor Warren Buffett told CNBC that "in terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending."

Nonetheless, any possible bubble "may not burst overnight," Ledbetter says.

Can bitcoin be used as a hedge against inflation?

Those who argue in favor of bitcoin often say it is a hedge against inflation and the U.S. dollar, and that it will survive any economic or infrastructure collapse, comparing it to gold.

"If you think of the structure of every single currency in the world, they're inflationary and they are controlled by governments," Pompliano says. "And those governments have very small groups of people who make the decisions as to what happens to that currency."

Because the supply of bitcoin is limited and it is controlled by computer code, Pompliano argues that it is "the greatest protector of purchasing power."

Investors are buying bitcoin as an inflation hedge, says Morgan Creek Digital
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Investors are buying bitcoin as an inflation hedge, says Morgan Creek Digital

Indeed, like gold, "there's no question that bitcoin can be a hedge against inflation, depending on the time frame of when you buy and whether it's held or sold," Ledbetter says.

However, Ledbetter notes, bitcoin is "way more volatile" than gold.

"As long as bitcoin is going up, sure, it's a great hedge against inflation, but it can also go down, and therefore, you're losing money – you're not just not keeping pace with inflation, you're actually losing capital."

Not everyone agrees, however.

"No matter how much [bitcoin] fans want to pretend that it's a hedge against doomsday scenarios, it is not," Cuban told Forbes. "Countries will take steps to protect their currencies and their ability to tax, so the more people believe this is anything more than a store of value, the more risk of government intervention they face."

This story has been updated to reflect Tesla purchasing bitcoin and its updated price.

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