One of the best-performing assets recently has been Bitcoin (BTC +4.76%). This top digital asset has seen its price skyrocket despite gut-wrenching volatility.
After a bear market rattled cryptocurrencies in 2022, it's been a bounce-back year in 2023. As of the afternoon of Dec. 8, Bitcoin is up 160% year to date. The optimism surrounding the world's most valuable crypto is high right now.
But while it's easy to be bullish, Bitcoin HODLers must always be aware of the downside, as this is still a very early-stage technology with an uncertain future. Along the same vein, here are what I view as Bitcoin's two biggest risks.
1. Government ban
The most obvious risk is that governments worldwide could ban Bitcoin, making it illegal to own or mine. This has happened in China, the world's second-largest economy.
For a completely digital asset like Bitcoin, a ban is more difficult to implement and enforce than physical gold, for example. But regulatory authorities can shut down centralized on-ramps into Bitcoin, like Coinbase or Block, making it that much harder to buy or sell.
The fear is that a major developed economy, like the U.S., in particular, will move to ban Bitcoin in some form or fashion. That's because Bitcoin, as a decentralized monetary network, threatens the entire existence of the Federal Reserve. A government's power is derived from its ability to control the money supply and tax its citizens. If Bitcoin gains in adoption, it could undermine this entire system.
But if the U.S. bans Bitcoin, I think people would be more inclined to want to own it because that would be an admission that it is something of value. Moreover, as a global asset, Bitcoin activity will just shift to a more friendly jurisdiction.
To be clear, it's becoming less likely that the U.S. will go this route. For starters, there's a risk of falling behind other countries when it comes to Bitcoin-related innovation. As more of the wealthy class starts to own Bitcoin, especially politicians and those who donate to political parties, the chance Bitcoin gets banned diminishes.
CRYPTO: BTC
Key Data Points
2. Quantum computing
At a high level, Bitcoin is basically just a massive database that keeps track of a history of transactions. The beauty of the network is that it is operated by a global and decentralized group of tens of thousands of computers, all running Bitcoin's software. Not having a central point of failure helps make the system antifragile.
But there could be a potential risk factor regarding Bitcoin's security: quantum computing. This is, essentially, an extremely powerful computer that can solve complex problems more rapidly than the strongest machines that exist today.
If these types of computers become cheaper to build in larger quantities, a bad actor could crack Bitcoin's cryptography, exposing everyone's private keys. And whoever does this would then be able to spend all this Bitcoin. At that point, no one would trust the network, likely causing Bitcoin's price to fall to $0.
It's hard to tell when we could see quantum computers go mainstream, but I believe the worries for Bitcoin are overblown. Developers aren't sitting around idle. They could come together to introduce technological updates to strengthen the network over time.
And think of all the other mission-critical information that could be exposed by quantum computers besides Bitcoin. Financial information and even military secrets could be revealed. This could have far worse ramifications for society.
It's worth pointing out that Bitcoin's network has never been hacked. The stories you've likely heard comprise of exchanges experiencing a data breach or something similar. Nonetheless, this proves that protecting data in an increasingly digital world is absolutely crucial. According to the Identity Theft Resource Center, the number of cyberattacks has nearly doubled from 878 in 2020 to 1,595 in 2022.
Even the strongest Bitcoin bulls shouldn't ignore these two major risk factors.
