Investing in new technologies, like Bitcoin (BTC 0.60%), introduces a huge amount of risk and uncertainty. But betting on this cryptocurrency has clearly worked out well, with the price up an unbelievable 21,810% in the past 10 years (as of Jan. 26).
It's still a smart idea to understand the bear case. If you're a current or prospective Bitcoin "HODLer," here are the five biggest risks you can't afford to ignore. Even after knowing them, I remain bullish on the digital asset.
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1. Regulatory
While this risk seems mitigated since the U.S. is fully embracing Bitcoin, stringent government actions, like heavily taxing Bitcoin transactions, can make it less appealing of an asset to own. And regulators, who support traditional banking entities, could make it difficult for crypto-only exchanges and financial institutions to obtain certain licenses to operate, for instance.
In the future, new politicians who have an objection to Bitcoin and view it as a tool for criminal activity might start passing laws making it illegal to own.
2. Environmental
Bitcoin's energy use is always a hot topic, given that mining transactions require huge amounts of electricity. While there are arguments that this proof-of-work system is actually necessary to maintain the network's security and that it promotes investments in clean energy infrastructure, Bitcoin is an easy target for those who support a move away from the use of fossil fuels.
3.Technological
Quantum computing (QC) has been a more pressing concern recently. If there were powerful enough QC capabilities, it could be easy to obtain Bitcoin holders' private keys from their public keys. This would undermine any trust the network has.
It's up to the Bitcoin community to be ahead of the curve and figure out solutions that can protect the blockchain's security should QC evolve rapidly.
CRYPTO: BTC
Key Data Points
4. Economic
The allure of owning Bitcoin is that it's an extremely scarce asset, since it has a hard cap of 21 million units. This makes it an attractive store of value, in theory, whose price should go up as more demand comes on board.
However, this narrative could shift unpredictably. The fact that gold has risen by 50% in the past 12 months, while Bitcoin's price is down 17% during that same time, shows that the latter might still be viewed as too risky for traditional investment portfolios.
5. Sociocultural
The final risk is that people simply just don't care for the advantages Bitcoin provides. Bitcoin transactions are final, unlike credit card payments that can be charged back. Bitcoin self-custody requires overcoming a technical learning curve, something that might not be for everyone.
Bitcoin exists as a solution to the marriage between money and state, as it separates the two. If citizens in countries around the world once again start to believe that governments and central bankers are doing what's in the best interest of the people, then it takes a shot at Bitcoin's most important supporting argument.
