Fewer assets recently have performed better than Bitcoin (CRYPTO: BTC). In the last five years, it’s up 1,490%. Since the start of 2023, it’s soared 283% (as of March 23). The digital token has continued its strong momentum through the first three months of this year.
This top cryptocurrency has cooled down a bit, sitting 13% below its new all-time high from a couple of weeks ago. Bullish investors are ready to buy the dip right now.
Before doing so, it’s important to know these five risks facing Bitcoin. Then you’ll have a solid well-rounded understanding of the asset.
Government intervention
Across the world, governments have central banks that set interest rates and control the money supply. This is what helps support their authority over their respective currencies and their finances.
Viewed in this light, it makes sense that a purely digital, borderless, decentralized monetary network such as Bitcoin would pose a potential threat to entities like the Federal Reserve and the European Central Bank. Bitcoin is a direct competitor, and it could make implementing monetary policy harder for central banks.
Consequently, it would be a huge blow if lawmakers decided to ban Bitcoin by making it illegal to own or mine it. Demand would likely fall off a cliff.
Software bugs
A lot of attention goes to Ethereum and its functionality for smart contracts, along with others, like Solana and Cardano. Each of these blockchains has unique features that might be appealing to developers and users.
Because this is still a novel technology, there are always major risks of updates being implemented that introduce software bugs. In this case, the network could break, undermining the system.
Bitcoin, on the other hand, has a simple software architecture. This is on purpose, as its primary use is as a store-of-value asset. However, should nodes choose to approve major upgrades, issues could occur.
Quantum computing
Another well-known technical risk Bitcoin faces is the possibility of quantum computing taking off. These are essentially supercomputers that can handle complex problems much faster than regular computers.
This new technology could potentially past undermine Bitcoin’s cryptographic setup, which is critical to its security. In theory, quantum computing has the power to expose all private keys, likely making Bitcoin’s network worthless as token holdings could be stolen with ease.
To its credit, Bitcoin has never been hacked yet. And its developer community has probably already thought about this threat. Adequate security measures could be built to defend against this, as well.
Scaling up
The biggest knock on Bitcoin is that it has minimal practical use as an actual payment method for transactions. The network can only handle 3.7 transactions per second, much lower than Visa, for example, which can process tens of thousands. One Bitcoin transaction also costs over $7 right now.
These figures aren’t good enough to scale Bitcoin if it hopes to handle a far greater number of transactions. It’s a decentralized network that prioritizes security, so speed hasn’t been a focal point.
There are innovations, as well, such as the lightning network. However, Bitcoin’s ultimate success is far from a sure thing. Perhaps it will never make it as a day-to-day payment system.
Ongoing volatility
No one will deny Bitcoin’s monster price rise over the past 15 years. The digital asset has outperformed most other investments. Its purchasing power has skyrocketed.
But the path has been full of gut-wrenching volatility. Even today, when Bitcoin carries a $1.3 trillion market cap, has growing financial services and tools that support it, and has largely become a mainstream asset, the price it sells for experiences meaningful ups and downs.
The difficulty of owning something like this might be too much of a challenge for some investors, which could cap Bitcoin’s potential.
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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 Risks Every Investor Must Know About This Magnificent Crypto was originally published by The Motley Fool