Bitcoin
Warning: Don’t buy Bitcoin before knowing these 5 risks
The world’s leading digital asset has soared in the last year and a half.
Over the past five years (as of June 26), the price of Bitcoin (BTC 4.06%) has soared 454%. There aren’t many assets that have outperformed this one, which currently has a market cap of $1.2 trillion.
There is compelling reasons for investors to buy the world’s leading cryptocurrency at the moment, especially since it is trading at 18% discount to its peak price. But there are risks too.
Regulatory
In the US, 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 responsible entity 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 to 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 It 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 break Bitcoin’s encryption and expose everyone’s private keys. This would undermine network security, likely causing the price to plummet.
In this scenario, however, there may be even more pressing problems. If quantum computing could hack the Bitcoin network, perhaps it could get past the security that protects financial institutions or governments.
While this is a risk to be aware of, I’m sure the Bitcoin developer 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.
Because of its focus on decentralization and security, speed has not been Bitcoin’s strong point. And it may never be able to handle a larger number of transactions.
A key Layer 2 development, known as lightning network, is under development. However, if it doesn’t work out, 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. The digital asset has seen multiple drops of over 50% throughout its history, making it anything but an easy ride for its holders.
It can be argued that Bitcoin is now a more popular financial asset than in the past. There are financial products that support its adoption, such as the new spot exchange-traded funds. And its market value rivals that of some of the most valuable companies in the world.
However, buying and owning Bitcoin for the long term may still pose too great a psychological hurdle for most. Until volatility is substantially reduced, this may continue to be the case.
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.