Bitcoin (BTC 1.18%) is one of the best performing assets in recent memory. In the past decade, this leading digital currency has skyrocketed about 185-fold. And today, it carries a market cap of $1.2 trillion, which rivals some of the world's most valuable companies.
With the cryptocurrency trading 18% off its record high, you might be ready to buy the dip. But before you do, take the time to understand these five key risks first.
1. Government intervention
Perhaps the most obvious risk is that the U.S., the world's most dominant economy, follows China's footsteps and completely bans Bitcoin within its borders, making it illegal to trade and mine it. Because it provides an entirely new alternative to the government's power over the money supply, the crypto is a direct competitor to the Federal Reserve.
Another adverse action governments could take is via taxation. In an effort to make Bitcoin a less desirable asset to buy and hold, the Internal Revenue Service might raise the capital gains tax on it, which could suppress demand from investors.
As time passes, though, this risk becomes less of a concern. We've already seen the crypto receive support on the political front. And it has infiltrated Wall Street, with the approval of spot Bitcoin ETFs.
2. Technical issues
When compared to other top cryptocurrencies like Ethereum, Cardano, or Solana, for example, Bitcoin's software is simple and basic. There isn't a complex upgrade timeline that needs to be executed and implemented flawlessly for it to succeed. But this is purely by design.
However, its developer community has introduced updates in the past when needed. And this will likely be the case in the future. The risk here is that altering the software could create a technical glitch that causes problems with the crypto's performance.
3. Quantum computing
At a high level, quantum computers can handle complicated problems a lot faster than regular computers. This introduces another technical risk.
If the field of quantum computing advances far enough, then some fear that it could break Bitcoin's cryptography, exposing everyone's private keys. In this dark scenario, its security would be undermined, which could cause its price to fall precipitously.
Bitcoin wouldn't be the only victim, however, as other highly protected institutions, like banks or government agencies, would also be prone to similar hacking. For what it's worth, Bitcoin already has some defenses against quantum computing, and I'm sure the digital coin's developers have long been thinking about further protection against this risk.
4. Scaling up
Bitcoin handles less than seven transactions per second (TPS) currently. That falls way short of payments giant Visa, which can process 65,000 TPS. The bears will say (voicing a concern that is justified) that Bitcoin will never be able to scale up in order to boost its throughput.
The crypto was invented with security and decentralization as its top priorities. Consequently, it might never be able to process a greater number of transactions. The layer-2 Lightning Network is being developed, but its success is not guaranteed. This just means that Bitcoin's ultimate use could only be as a store of value, not a medium of exchange.
5. Volatility
Although Bitcoin has crushed the stock market since its launch about 15 years ago, the journey has been anything but smooth. It has registered multiple drawdowns of more than 50%, which can be stomach-churning for even the most mentally strong investors.
To be fair, the volatility has decreased as this crypto has matured. But maybe it will always bounce around like a growth tech stock. This can discourage the late adopters from fully embracing Bitcoin, capping its ultimate price potential.
