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 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 as it trades at 18% of its peak price. But there are also risks.
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, primarily because it is a borderless, decentralized digital 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 underpin 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 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 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 consider, 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 nearly 15-year history.
Speed and scalability
According to bitinfocharts.com, Bitcoin can only process six transactions per second 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.
The story continues
A major Layer 2 development known as the Lightning Network is in the works. 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. This digital asset has suffered multiple declines of over 50% throughout its history, making it anything but an easy ride for its holders.
It could be argued 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 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.
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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