There aren’t many assets that have outperformed Bitcoin (CRYPTO: BTC). In the past five years, it has skyrocketed more than 1,100% (as of April 23). That far outpaced the Nasdaq Composite index, for example.
To be clear, I’m still bullish on the top cryptocurrency. Even at its current price of roughly $66,700, which is 10% off the peak, it looks like a smart buying opportunity.
However, I believe it’s always a good idea for investors to understand the bear case for any asset they own or are considering.
Government intervention
The most obvious thing that could put a bearish headwind in the way of this booming crypto would be governments putting strict regulatory measures in place around it. Countries could make it illegal for their citizens to buy Bitcoin, or for anyone to mine it within their borders — effectively banning it. This is exactly what China has done.
If the U.S. ever followed a similar approach, that would mean the richest country on Earth was excluding itself and its citizens and businesses from legally supporting Bitcoin. This could crush the crypto’s price by alienating a massive pool of capital.
But why would governments want to ban Bitcoin? Bitcoin is a direct competitor to central banks across the world. These entities control benchmark interest rates and fiscal policy, which largely means they control their nations’ money supply. As a decentralized monetary network that transcends borders, Bitcoin can undermine this power.
However, the Securities and Exchange Commission’s recent approval of spot-price Bitcoin exchange-traded funds (ETFs) in the U.S. might reveal a more favorable regulatory stance, both from Washington and Wall Street.
Technical uncertainty
We also can’t ignore technical risks. Bitcoin has been around for about 15 years, but blockchain technology is still a novel innovation. We don’t know what changes developers have in store for the Bitcoin network, which leaves plenty of uncertainty as to how it might look 15 years from now. Those changes could have consequences for the stability and trustworthiness of Bitcoin generally.
Admittedly, Bitcoin’s software is intentionally simple, and the system is designed so that the majority of nodes need to approve any proposed changes. If there’s any risk that an update could break something, the hope is that such a change would be rejected. Nevertheless, there’s always a chance that a problem could get through.
Another factor that adds technical uncertainty is the potential of quantum computing. A number of companies and research groups are developing new supercomputers that leverage quantum mechanics to solve certain types of extremely complex problems vastly faster than traditional machines. Some of these problems — in cryptography, for example — are viewed as more or less unsolvable by standard computers in any useful time frame. Alphabet and Microsoft are among the major companies working on this technology.
If the technical challenges of quantum computing can be overcome, such machines would likely be able to crack the Bitcoin network’s cryptography, shredding its security features. Everyone’s private keys — and their Bitcoin — would be at higher risk of being stolen. And if the public loses confidence in Bitcoin’s security as an asset, its value would be in trouble.
To put a positive spin on this scenario, developers could also use quantum computing to develop a new and improved security mechanism for the crypto. In other words, Bitcoin could adapt.
Losing interest
Another risk that I see is so far flying under the radar in the investing world. There’s always the possibility that people will simply lose interest in Bitcoin as time passes. Many individual and institutional investors, as well as corporations and governments, have gravitated to the asset over the past decade. But that has mainly been because its price has continued to go up, despite a lot of volatility along the way.
I suspect that if Bitcoin doesn’t continue satisfying its owners’ desires for rapid gains, then over time, money could flow out of crypto and back to traditional asset classes like stocks and real estate. Those outflows would further depress prices, and disappointing results would discourage new investors from buying Bitcoin.
The counter to this thesis is that over the past 15 years, Bitcoin has remained relevant. The longer it continues to, the more I believe that it’s not going anywhere.
Even after weighing these compelling bear-case arguments, I’d say Bitcoin bulls should have even more conviction.
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This Phenomenal Crypto Has Skyrocketed by 1,100% in the Past 5 Years. Here’s the Bear Case You Need to Understand was originally published by The Motley Fool