23 Μαΐου 2024

The threats for bitcoin

The threats for bitcoin

It is important for anyone investing in an asset to be aware of the potential risks, at least those that they can consider as possibilities. This is also done by companies that are about to be listed on the Stock Exchange, in their prospectuses, which list the risks so that interested investors are aware of them. And this is good for investors.

I am doing the same here, for Bitcoin and for a period of the next three to five years.

Potential Incidents That Could Cause a Bitcoin crash or even extinction, in the years ahead:

Here are some incidents, a mix of black swan (highly unpredictable) and grey swan (more predictable) events, that could cause a crash in Bitcoin’s price or even extinction, within the next, up to five years:

1. High Energy Prices: Will force miners to sell to cover their expenses, and make / secure a profit, creating selling pressure and panic. (Grey Swan)

2. Some big bitcoin holders like Microstrategy or Tether, will be forced for some reason (they may need liquidity / cash) to Sell. If a major player proceed to a relatively big sell, this will create sell pressure in bitcoin’s market, and then, panic. (Grey Swan)

3. Regulatory Crackdown: Governments around the world, especially those of big and powerful states, could enact stricter regulations on cryptocurrencies, impose restrictive measures on mining for crypto-assets based on Proof-of-Work (PoW) (e.g. for environmental concerns), impose also high taxation on cryptos, that: a) will cause a loss of confidence among investors and leading to a mass exodus from Bitcoin and other digital assets, and b) Will make cryptos way less attractive, and lead to a decline in demand. (Grey Swan)

4. Major Hacking Event on a Bitcoin Exchange: A large-scale and successful hack on a major cryptocurrency exchange, leading to a significant loss of Bitcoin, could severely damage trust in the market and trigger a sell-off. (Grey Swan)

5. Quantum Computing Advancement: If advancements in quantum computing significantly accelerate the timeline for breaking Bitcoin’s encryption, it could render the entire network vulnerable and cause a loss of confidence. (Black Swan)

6. Stablecoin Collapse: A major stablecoin, like Tether (USDT), losing its peg to the US dollar could trigger a domino effect, causing panic selling across the cryptocurrency market, including Bitcoin. (Grey Swan)

7. Macro malaise downturn – A severe economic downturn, a liquidity crisis or financial crisis, such as a recession, or sovereign debt default, could trigger widespread panic selling across all asset classes, especially on those considered of high risk, as investors seek to liquidate holdings to cover losses or meet liquidity needs, and flee to safety and certainty. (Grey Swan)

8. Major Geopolitical Event: A geopolitical conflict, such as a war or geopolitical tensions between major powers, could lead to increased volatility in financial markets and prompt investors to seek safe-haven assets, but uncertainty surrounding Bitcoin’s status as a safe-haven asset could result in a sharp sell-off. (Grey Swan)

9. Splitsville breakup – A messy split or factionalization occurs within the bitcoin development community over an important protocol update (remember forks, exact copies, are already happened), halting progress and creating digital asset risk. (Black Swan)

10. With ETF issuers holding more and more bitcoins, would negatively impact the number of transactions on the Bitcoin network, and miners will lose any incentive to keep validating transactions. The end result is miners turn off their machines as they can no longer pay for the energy required to run them. Without the miners, the network dies, and Bitcoin vanishes. (Grey Swan)

Of course there may be other black swans that as such, will be completely unpredictable, that we will not even have imagined.

Panayotis Sofianopoulos

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