Thanks to booming optimism among investors, even what many consider to be speculative assets are experiencing strong gains. For example, Bitcoin (CRYPTO: BTC) has skyrocketed 211% since the start of 2023, and it’s already up 22% this year (as of Feb. 15).
Before you rush to buy the world’s most valuable cryptocurrency to take advantage of the momentum, take the time to understand the top five risks that it faces.
Government intervention
When people think about what can go wrong with Bitcoin, I think the biggest risk factor that comes to mind is governments simply banning it. This means they would make it illegal to own it or transact with it, and mining the cryptocurrency would also be a criminal act.
Because governments, with their central banks, control interest rates and money supply within their borders, it makes sense that they’re threatened by Bitcoin. The decentralized monetary network is a direct competitor to the current monetary system.
However, the recent approval of spot Bitcoin exchange-traded funds provided somewhat of a stamp of approval that this is indeed a legitimate financial asset in the eyes of regulators, at least in the U.S.
Quantum computing
Bitcoin’s entire security is dependent on cryptography. Whoever controls the private keys controls the Bitcoin. Up until this point, Bitcoin has never been hacked, which demonstrates how secure the network has been.
But quantum computing poses a risk. These are machines that can solve complex problems faster than regular computers. The worry is that quantum computing can crack Bitcoin’s cryptography, exposing everyone’s private keys, thus rendering the network useless and worthless.
Of course, in this scenario, every other piece of data that is protected by high levels of digital security — like data from tech firms, financial institutions, or even governments — could be hacked as well. In Bitcoin’s case, developers could use quantum computing to come up with an upgraded version of the security system.
Software errors
Bitcoin differs from other popular cryptocurrencies, like Ethereum, Cardano, or Solana, because its architecture is incredibly simple. This is purely by design. Simplicity limits the chances that something can go wrong.
Ethereum has numerous planned upgrades ahead. But this adds tremendous technical risk to the equation, because any time the software is changed, there’s a high chance that an error will happen. This could undermine the entire network.
Bitcoin has had some upgrades in the past, which ended up being minor tweaks. However, should developers introduce major changes, issues could present themselves.
Scaling issues
Bitcoin processes only 3.5 transactions per second, which is significantly below other cryptocurrencies, and far lower than Visa‘s throughput of 65,000. Moreover, a typical Bitcoin transaction currently costs $9.40.
Slow speeds and high fees are what critics point to as the key reasons why Bitcoin won’t ever achieve mass adoption. Because the network is so decentralized, with no authority in charge, there’s a big question about how Bitcoin can scale up to handle more activity.
The lightning network is a prominent innovation that could drive greater usage over time. This Layer 2 solution creates different payment channels between users, who then settle their final transactions to the main Bitcoin blockchain. But its success is far from guaranteed.
Ongoing volatility
Bitcoin’s current market cap sits at $1 trillion, comparable to some of the most dominant tech businesses on the face of the planet. And because of how much media coverage it gets, coupled with the growing list of financial products and services that support it, one could argue that Bitcoin has now become a mainstream asset.
However, Bitcoin’s price currently sits 23% below its all-time high, and there have been numerous instances historically where the asset experienced greater than 50% drawdowns. As more individual and institutional investors start to buy and hold Bitcoin, its volatility should naturally come down.
For some, though, the ongoing stretches of highs and lows might be too much to stomach. This could limit Bitcoin’s ultimate adoption.
Should you invest $1,000 in Bitcoin right now?
Before you buy stock in Bitcoin, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Bitcoin wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of February 12, 2024
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Cardano, Ethereum, Solana, and Visa. The Motley Fool has a disclosure policy.
5 Top Risks Every Bitcoin Investor Should Know was originally published by The Motley Fool