Bitcoin is up by roughly 1,800% in 2017 as of this writing, and experts have projected that it could reach as high as $1 million. However, that's just one side of the argument. Any responsible investor needs to consider both ends of the realm of possibilities -- in this case, it's certainly possible for bitcoin to go much higher if things go well, but there are several reasons it could come crashing down, so let's take a look at some of them.
Also, keep in mind that a $1,000 bitcoin value was seen as high not too long ago. In fact, bitcoin's rise has been so rapid that the digital currency could crash to $1,000 and still be higher for 2017. And under any of these circumstances, or a combination of them, it's not inconceivable for bitcoin to give back its gains and then some.
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1. Profit-taking
Bitcoin's price has gone nearly straight up for much of 2017, so it's fair to say that there are quite a few people out there sitting on some major profits.
At the end of the day, bitcoin's price is governed by the same basic dynamic that determines the price of almost everything else: supply and demand. It's also fair to assume that at some point, people who bought bitcoin a while ago are going to start taking some profits.
If a significant amount of bitcoins starts to be sold, to the point where the supply on the market exceeds demand, it could put significant downward pressure on the price of bitcoin until equilibrium is achieved.
2. Speculators lose interest (or run out of money)
The other side of the supply and demand equation is the speculators – that is, the people who are buying bitcoin in the hopes the digital currency will be worth more in the future.
As of the latest available data, bitcoin transaction volume has spiked by 55% in 2017, and 30,000 new bitcoin wallets are created on the average day. So far, this has been enough to keep demand ahead of supply, which has fueled bitcoin's rally. However, if the growth in trading volume begins to fizzle out, or trading volume declines, it could send bitcoin's price spiraling downward.
3. Government regulations spoil the party
The prospect of government regulation is another potential wildcard, and could work for or against bitcoin and other digital currencies. For example, Japan recently recognized bitcoin as a valid method of payment, which is a big reason for the current rally.
On the other hand, many other countries around the world haven't regulated bitcoin much -- yet. The United States hasn't done much, other than labeling cyptocurrencies as capital assets and issuing warnings to investors. However, if a major country were to, say, outlaw bitcoin transactions as a way of cracking down on money laundering, it could have devastating effects.
4. A major hacking incident occurs
In 2014, the Mt. Gox bitcoin exchange handled 70% of all bitcoin transactions. However, this came to a screeching halt in early 2014 when the exchange suspended trading and announced that hackers had stolen about 850,000 bitcoins, which were roughly worth $473 million at the time and represented 7% of all bitcoins in circulation.
Not surprisingly, bitcoin's price crashed. In fact, the Mt. Gox breach triggered the sharpest fall in bitcoin's price to date.
To be fair, bitcoin exchanges have taken steps to become far more secure than they were just a few years ago. It is highly unlikely that a theft of this scale, or even close to it, could happen anytime soon.
With the now-higher price of bitcoin, though, it wouldn't take a massive breach to make headlines and erode the trust of bitcoin investors. For example, if just 100 bitcoins got hacked, about 0.01% of the size of the Mt. Gox breach, an accurate headline could read "$1.6 Million in Bitcoin Wealth Stolen by Hackers," and could certainly scare investors enough to trigger a fall.
5. Slow transaction speeds get even worse
I've written before that one of the biggest obstacles to bitcoin's widespread adoption as a method of payment is the increasing transaction times on the network. Simply put, the blockchain network is ill equipped to handle large numbers of transactions in its current form, and the surge in interest in bitcoin is leading to delays.
It takes 78 minutes to process the average bitcoin transaction, according to Blockchain.com, but this has recently spiked to as long as 1,188 minutes (almost 20 hours) during peak volume times.
And keep in mind that these delays are occurring without bitcoin being widely used to pay for goods and services. Just a mild uptick in the day-to-day usage of bitcoin could lead to major delays and stop bitcoin's mainstream acceptance in its tracks.
6. Rising transaction costs
One of the major draws of bitcoin as a payment mechanism is its low transaction costs -- or at least it used to be. After all, if it costs a merchant 3% of the transaction amount to accept a credit card, but just a few pennies to accept bitcoin, that solves a real problem.
However, this hasn't been the case recently, especially as bitcoin soars in value. People are paying $28 for the average bitcoin transaction right now, and are even paying exorbitant fees on small transactions, like sending $100.
In stock investing, it's smart to look for a company's durable competitive advantage. By becoming expensive and slow, bitcoin is at risk of losing its competitive advantage unless a solution is found.
7. Other digital currencies gain traction
It's also worth mentioning that other digital currencies aren't having these issues. For example, Litecoin transactions take just over two minutes and cost just $0.60 on average. Ripple, a relatively new digital currency, takes just seconds to process a transaction and costs less than a penny.
The point is that if other digital currencies begin to look like better alternatives, it could cause bitcoin investors, even the die-hard cryptocurrency fans, to head for the exits in favor of other currencies.
Just one side of the story
Before I'm labeled as a "bitcoin hater" or anything like that, I should point out that this is only one side of the story. Sure, I believe that bitcoin could crash (and that everyone who buys bitcoin needs to acknowledge this possibility), but the digital currency could also soar to a six-figure price tag if things go well. In fact, I've written before that bitcoin could reach $1 million or more under the right circumstances.
The point is that like any young and exciting market, there's an enormous amount of uncertainty surrounding bitcoin's future, and it's important to consider all possibilities before jumping in.
