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Understanding the risks and rewards of Bitcoin

January 30, 2014|By Mick Swasko, @swasko | RedEye

Bitcoin isn't a traditional payment method, and that comes with risks. Know what you're getting into.

1. Your digital wallet should be secure. Bitcoin warns that "great security concerns" are a tradeoff for some of the currency's benefits . The site suggests using trusted providers and doing research before choosing a digital wallet, exchange or any other provider that deals in Bitcoin.

2. A dollar is a dollar. But with Bitcoin, prices can be shaky. Bitcoin itself describes the currency as a "high-risk asset."  In December, a single bitcoin worth $1242 in the morning tanked to less than $600 at the end of the day, on news that an exchange in China would no longer be accepting payments.

3. No take backs. With Bitcoin, payments are irreversible, which is risky. A typo in an address to another Bitcoin customer could cause the wrong person to be paid, and merchandise purchased can't be refunded.

4. There's not a lot of anonymity. All Bitcoin balances and transactions are permanently stored on a public network. If someone knows your Bitcoin address, he or she can see your current balance and your purchases. It is possible, and recommended, that a new address be obtained for each transaction, which is possible through available software. Third-party software claiming to increase anonymity is also available. 

5. Transactions are instant. Unlike a bank, where it may take some time to withdraw funds, bitcoins are extracted nearly instantaneously and confirmed within minutes. Bitcoin warns there is a possibility that someone could pay you and reverse the payment in that short window. At least one confirmation of payment is recommended.

6. Uncle Sam. Even though it's not cash, bitcoins aren't exempt from taxes. Depending on what state or country Bitcoins are used in, you may still be liable for income, sales and other taxes.

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