Last September, El Salvador made headlines by becoming the first country to adopt Bitcoin (BTC 0.27%) as legal tender. Unsurprisingly, the move was met with a ton of skepticism, as well as major support from the crypto community. No other nation has made such a move, indicating how far the top cryptocurrency still has to go to achieve widespread adoption. In fact, some countries are taking harsher stances, in some cases completely restricting crypto use.
Consequently, the most important risk Bitcoin investors need to focus on is the possibility of more government intervention. Let's take a closer look.
Decentralization is a threat to governments
Bitcoin was created in 2009 to be a global, peer-to-peer, electronic cash system without a central authority in charge. Governments have complete control over their money supplies. Bitcoin was built to circumvent the established structure of monetary policy as we know it, so it's no wonder that the founder, Satoshi Nakamoto, remains anonymous.
With this perspective in mind, it's easy to see why governments and other entities in charge would try to block Bitcoin's progress. Last year, China, the world's second-biggest economy with a population of 1.4 billion people, effectively made all cryptocurrency use illegal within the country. Egypt, Iraq, Qatar, Oman, Morocco, Algeria, Tunisia, and Bangladesh have also made cryptocurrencies illegal within their borders.
After China banned mining last June, eliminating more than half of the world's mining capacity instantly, Bitcoin didn't take long to recover. Its price tumbled from early May to late July but came roaring back, doubling over the next three months.
Something known as hash rate, which measures the amount of computing power on Bitcoin's network at any given time, was back to its previous levels by December. If more governments continue banning Bitcoin left and right, it would pressure the coin's price in the near term. But as we've seen after China's decision, Bitcoin will likely bounce back, proving how resilient its decentralized structure is.
Fidelity, the massive asset manager, recently released a report that said that even if certain countries don't support or believe in Bitcoin at all, it's still a smart decision to buy some. That's because it views a complete ban as unlikely since that would be a "significant loss of wealth and opportunity." Therefore, owning even a small amount would be a hedge against having to pay a much higher price in the future.
Nonetheless, there's always the possibility that governments take a stricter stance in 2022, especially at a time when cryptocurrencies are starting to be more prevalent.
Regulatory clarity might be a catalyst
Here in the U.S., the Biden administration is planning to issue an executive order this month that would require different agencies to start assessing the risk cryptocurrencies pose to national security. At first glance, it's easy to view this upcoming event as an unfavorable development for the entire crypto industry. I think this might be an incorrect assumption.
Even amid the threat of greater government intervention, Bitcoin could still prosper. And this is because the White House's initiative would provide much-needed clarity regarding how cryptocurrencies would be viewed by regulatory agencies, in general. After all, the goal is to create a workable regulatory framework, a situation that could enable even more innovation in the space as stakeholders who were apprehensive about working on crypto projects now take the plunge without hesitation.
I'm sure there are institutional investors and corporations in the U.S., wanting exposure to the burgeoning asset class, that have so far been reluctant to purchase Bitcoin strictly because they don't know how Washington plans to handle it in the future. The upcoming announcement could bring more buyers into the market, forming a catalyst to support a higher price.
Bitcoin is the world's most valuable cryptocurrency, and with that status comes intense scrutiny. The battle between Bitcoin and bureaucracy will be one to watch in 2022.