Since it peaked in November 2021 at nearly $3 trillion, the cryptocurrency market has lost about 50% of its value. And Bitcoin (BTC 0.61%)The world’s most valuable digital asset, with a market capitalization of $600 billion (as of May 9), has followed this trend. It decreased by 28% in 2022.
The Federal Reserve’s plan to raise interest rates throughout the year to curb high inflation is driving investors away from riskier assets, a class of cryptocurrencies to which it belongs. But I try not to let what happens with prices dictate my investment strategy. Instead, I focus my eyes on the next decade.
When it comes to BitcoinI believe in it Advantages of long-term investment. However, there are some major risks that I am constantly concerned about. Let’s take a closer look.
The threat of regulation
Not surprisingly, the biggest threat to Bitcoin and cryptocurrencies in general is the threat of tighter regulation. In 2021, China, the world’s second largest economy, made it virtually illegal for citizens to mine or hold any cryptocurrency. The government in India, a country of 1.4 billion people, has imposed a 30% tax on cryptocurrency transactions in an effort to rein in the market.
Governments, with the power to direct cash supplies and tax their people, don’t want to give up control, something that bitcoin is undermining. However, countries that ban cryptocurrencies could fall behind in terms of innovation and attracting investment and talent. This is why the Biden administration’s approach, which tasks several government agencies with researching and finding ways to securely back digital assets, is a positive in my view. It keeps the United States at the forefront of the cryptocurrency industry.
Two countries, El Salvador and Central African RepublicThey filed a legal tender for Bitcoin within their borders. I think other developing countries, especially those whose economies are linked to other countries’ currencies, will likely follow this path. Bitcoin aims to bring power back to the people, and I believe that power will eventually overcome any single country’s efforts to ban it.
The Bitcoin network is working on a file proof of work A mechanism for validating transactions. This means that computers are very expensive and take a lot of energy to solve complex math problems to add new blocks to the Bitcoin blockchain. It is a slow process, with a typical transaction taking approximately 10 minutes to process. Bitcoin can only handle three transactions per second (TPS).
Compare this to Visawhich operates the largest payments network in the world. Visa has the capacity to process 65,000 TPS, a level that clearly supports its usefulness in people’s everyday lives. In order for Bitcoin to learn about mainstream use cases, such as remittances or even basic transactions to buy things, its throughput must expand exponentially.
The Lightning Network is the solution that aims to solve this problem. On top of the Bitcoin network sits a layer 2 blockchain that creates a direct connection between separate users to facilitate fast and cheap transactions. An example would be a tenant who pays rent to their landlord on a monthly basis. Since the balances are on the Lightning Network and are only sent to the Bitcoin mainnet for publication when both parties wish to terminate the payment relationship, they work around the limitations of Bitcoin’s ability. Therefore, Lightning can be a huge contributor to the benefit of Bitcoin.
Volatility is still high
I personally do not see volatility As a risk, but a lot of people do it. I believe that the continued fluctuations in the price of bitcoin will keep individuals and institutions on the sidelines when it comes to buying bitcoin as a store of value, its biggest use case today.
The most common bull argument for Bitcoin is that it is ultimately equated with gold as a store of value. The value of all the gold mined on Earth is estimated to be worth $12 trillion north, so if this situation becomes a reality, Bitcoin has an incredible runway for price hikes. Moreover, Bitcoin’s main characteristics – it is divisible, completely finite, and manageable – make it superior to physical gold.
However, since Bitcoin is so volatile, investors may not have the guts to own it. This is especially difficult in today’s internet-driven society, where we are constantly bombarded with news and price updates sent to our phones. Being able to handle ups and downs by ignoring the inevitable volatility is critical to keeping Bitcoin in your wallet.
Understanding these important risks should help you know whether or not buying Bitcoin is a good investment.