Bitcoin is going through yet another challenging cycle, placing the investments of hundreds of investors in the ambiguous territory of risk and opportunity. It is no secret to anyone that Bitcoin’s price behaviour sometimes resembles that of a bubble, rising sharply on the crescent of positive or sensational news backgrounds before dropping sharply. Such dynamics can be difficult to navigate for day traders and will at times lead to doubt and loss of investor confidence.
The pin that is to proverbially burst said bubble could be lots of things, much like that anything that can inflate it. The following is a list of some of the factors that could be acting against Bitcoin in the foreseeable future.
Risk 1: Regulation
Though regulation is always seen as a necessity for any developed market and most crypto enthusiasts agree that crypto regulation would improve industry performance, restrictive measures are in direct opposition to the virtue of Bitcoin. Its decentralized nature enables the free and borderless flow of capital associated with financial freedom.
Regulation would inevitably restrict said freedoms and turn Bitcoin into yet another mainstream financial instrument for payments with all associated limitations. This could disenfranchise Bitcoin maximalists and create a parallel clandestine market in the industry that will resist the regulated sector.
On the other hand, regulation is certain to attract more market participants. This might have a positive impact on price. However, as more Bitcoin gets stored in cold wallets, one could argue that this might eventually lead to reduced liquidity which in itself might be found to impair payments. The point of contention here is whether Bitcoin ought to function as reserve asset, transacted mostly in bulk, or whether it ought to be a highly liquid free-flowing currency used in everyday life. There is, of course, a case to be made for both these directions depending on where we stand on the adoption curve.
Risk 2: Institutional-Grade Market Infrastructure
The development of an institutional-grade market infrastructure is another regulation-associated risk that could corrupt the value of Bitcoin as a decentralized asset designed initially for public use.
Considering the amount of funds invested in Bitcoin under registered custody, it is difficult to imagine governments taking a laid-back approach to regulating such investments. With funds under risk of seizure or strict government control, it is likely that holders of Bitcoin will start keeping their assets on private wallets, while regulation requires institutional investors to outsource custody.
The risk lies in a potential split between white and black markets for crypto. This in turn might make it increasingly harder for institutional investors to be compliant, which could lead to their exit.
Risk 3: Government Crackdowns
China – the biggest producer of Bitcoin – is already on the move – tightening its grip around miners and forcing them to emigrate to safer mining havens. Should other governments follow suit with restrictions or regulations, especially in jurisdictions with developed crypto communities, Bitcoin may suffer in terms of price and liquidity.
Though the risk has been hovering in the air for years, the fact that Bitcoin is a decentralized and borderless coin makes it highly unlikely that a global crackdown is looming. In addition, coin holders can simply lay low and wait for the dust to settle.
Risk 4: Quantum Computing
The Bitcoin network is still vulnerable to attack, especially from advanced systems. Though quantum computers are still nascent, protection mechanisms are already being developed. An example is MIT, which is working on improving BTC security. In the end, and as in all industries, cybersecurity is an ongoing battle. Bitcoin is one of the most secure networks ever created and, if anything, it is better protected against hacks than any other online business or financial institution.
Learn more about how quantum computing can pose a threat to bitcoin.
Risk 5: 51% Attack
Though the likelihood of 51% of all Bitcoin consensus nodes coming under the control of a single entity is low, it is still theoretically possible. At the same time, over the past few years, more miners have entered the scene and they are based in different jurisdictions.
Learn more about 51% attacks
Risk 6: Community
Perhaps the greatest risk to Bitcoin comes from the crypto community around it. In the community itself discussions around block size, confirmation time and rate of issuance have led to rifts and hard forks. Also, as we could see with Elon Musk – when supposed insiders turn against Bitcoin, it can be damaging.
In the end, none of these scenarios are fully predictable in their outcome. If anything, the value of thinking through these problems and threats is to come up with solutions. It also helps to consolidate our thinking and engage in intelligent discourse as we continue the work of driving adoption.