In a past article, we covered some of the main reasons why investing in bitcoin, the emerging digital currency that has shaken up the financial world, would bring you a nice profit.
While investing in bitcoin seems like it comes along with tons of various benefits, there are also particular risks worth looking out for prior to making the decision of betting your money on the digital currency. Without further ado, here are five reasons why you might want to reconsider the currency.
1. Lack of central authority can end bitcoin’s progress
Interestingly, one of the digital currency’s main advantages may also be one of its biggest flaws. As you may already know, bitcoin is a decentralized currency, which means that no central authority governs it and its future. Because of this, the need of consensus for every protocol change, can lead to inertia. In the long run, this can postpone its progress, while also slowing adoption. One example is the bitcoin block size debate, which needs full consensus from the community, before a solution is finally implemented.
2. It’s highly volatile nature can bring in a crackdown
It was not long ago that bitcoin’s value surpassed $1,000. However, at the time of writing, the currency’s value is of roughly $420. This, alongside with many other volatility trends can be attributed to worldwide events. Negative media attention has proven to have a strong impact on its price. Additionally, regulatory issues in different countries can also significantly alter the currency’s value- for the better or worst.
3. Internet issues can split the bitcoin network
At this moment in time, a high percentage of bitcoin transactions are carried out in China, where a vast majority of miners reside. China is famous for its Great Firewall, which can limit internet user’s access to any site. If this happens, bitcoin transactions can continue in China, but once the limitation is removed, an irreconcilable fork will occur.
4. There’s a significant issue in the reward miners get for their work
Currently, the block reward is the one thing that makes mining worth it. However, the bitcoin protocol is designed in such a way to halve this reward every couple of years. Once this happens, miners will get less bitcoin, and thus relay more on transaction fees. Regardless of this, studies have shown that a miner’s revenue is roughly made up by 0.3% from fees, with the rest coming from block rewards. If bitcoin’s value doesn’t rise, once the next halving will occur, miners can potentially lose interest, as the work becomes unprofitable.
5. Bitcoin can always be passed by a competitor
There are thousands of altcoins, each with their advantages and disadvantages. Considering that bitcoin can fail, another protocol can overtake it, thus cause disruption for those who have invested in it, and for the value of the currency itself.
Based on everything that has been outlined so far, how do you weigh in the advantages and disadvantages of a bitcoin investment? Let us know your thoughts in the comment section below.