Bitcoin
Don’t buy Bitcoin before knowing these 5 risks
Over the past five years (as of June 26), the price of Bitcoin (CRYPTO: BTC) soared 454%. There aren’t many assets that have surpassed this one, which currently carries a market capitalization of $1.2 trillion.
There is compelling reasons for investors to buy the world’s leading cryptocurrency at the moment, especially as it trades at 18% off its peak price. But there are also risks.
Regulatory
In the USA, the Federal Reserve has a powerful influence on the economy. This is because it can set interest rates and adjust the money supply to stimulate or restrict growth. The central bank essentially controls the currency and affects the country’s finances.
Bitcoin is a direct competitor to the current system, mainly because it is a digital, borderless and decentralized monetary network. There is no single entity in charge and the rate at which new coins are mined cannot be adjusted.
Perhaps the biggest risk for Bitcoin is that the US or the European Union decide to ban it.
Software
Ethereum, CardanoIt is Solana are built with functionality for smart contracts. Bitcoin, on the other hand, has a simpler technical design because its primary use is as a store of value asset.
However, software bugs can be introduced at some point. This could happen, for example, if a majority of the computer operators that support the blockchain approve a network upgrade that produces errors in the ledger that stores all transactions.
Quantum computing
Continuing on the topic of technical risks, quantum computing is a technology that could cause problems for Bitcoin. Quantum computers can process complex problems much faster than other types of computers.
The idea is that they could crack Bitcoin’s encryption and expose everyone’s private keys. This would undermine the security of the network, likely causing the price to plummet.
In this scenario, however, there could be even more pressing problems. If quantum computing could hack the Bitcoin network, it might be able to bypass the security that protects financial institutions or governments.
While this is a risk to be aware of, I’m sure the Bitcoin development community is thinking about defending against this with new security measures. And for what it’s worth, Bitcoin has never been hacked in its roughly 15-year history.
Speed and scalability
According to bitinfocharts.com, Bitcoin can only process six transactions per second right now. This is significantly slower than a platform like Visathat can handle 65,000.
Due to its focus on decentralization and security, speed has not been Bitcoin’s strong point. And you may never be able to handle a larger number of transactions.
The story continues
A key Layer-2 development known as the lightning network is under development. However, if it fails, Bitcoin’s price potential could be limited.
Volatility
While Bitcoin has been a fantastic investment over the past few years, it has been an extremely volatile journey. This digital asset has suffered multiple declines of over 50% throughout its history, making it anything but an easy ride for its holders.
One could argue that Bitcoin is now a more popular financial asset than it has been in the past. There are financial products supporting its adoption, such as the new spot exchange-traded funds. And its market capitalization rivals that of some of the world’s most valuable companies.
However, buying and holding Bitcoin for the long term may still pose a major psychological hurdle for most. Until volatility is substantially reduced, this may continue to be the case.
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Neil Patel and its clients do not have a position in any of the stocks mentioned. The Motley Fool has positions and recommends Bitcoin, Cardano, Ethereum, Solana, and Visa. The motley fool has a disclosure policy.
Warning: do not buy Bitcoin before knowing these 5 risks was originally published by The Motley Fool