In 2021, Bitcoin had an all-time high of being valued at nearly US$65,000 in April. But as the year has been going, the digital coin closed with a drop of roughly 47% from its record high.
While there are still groups of people holding onto bitcoin for now, putting their faith in the recovery of the coin, other investors are wary of just how volatile it is and what that means for their portfolios.
With that being the state of investors at this point, here are five biggest risks that Bitcoin – and really any cryptocurrency – will be facing moving onward.
The biggest is regulation.
We know already that China has clamped down on the cryptocurrency industry in many ways. Their efforts have forced companies like major banks and Alipay to not do business with crypto companies at all.
That global crackdown then started to spread to the UK where regulators have banned the company Binance from undertaking regulated activities.
The US is another big player and is particularly concerning because there are several departments that could regulate crypto. To the US government, is crypto a security? A commodity? A property? Depending on how the government sees it will determine what sort of actions that’ll be taken.
That said, the US officials and Treasury Secretary have already warned about crypto being used for illicit transactions.
Any crypto enthusiast will know any crypto is highly volatile. In April last year Bitcoin was approaching US$65,000. By June 2021 it tumbled to US$28,911 and has climbed back up to over US$34,000 at this point.
Anyone who is bullish in Bitcoin now sees this as a kind of “digital gold” – an asset that could provide great returns when the economy is in turbulence. That sounds fine, but volatility works both ways.
You can double your money if you bought bitcoin in January and cashed out In April. If you did that you would’ve made a return of 18%.
And over 12 months, you would’ve earned more since bitcoin tripled in price.
This volatility is a risk for many investors looking to get in, though some experts have said that aspect isn’t a barrier to widespread adoption. According to Ross Middleton, CFO of DeversiFi has speculated the $30k-$40k range serves as a base price and that new capital will flow into the asset and the market at large.
As our planet is heating up further, another rising concern is the environmental impact cryptocurrencies have. Bitcoin mining is still going on and it demands a high amount of electricity to run.
It demands an annual energy consumption equivalent to the Netherlands energy needs to put it into perspective. And a lot of the mining – and energy consumption – stems from fossil fuels sources.
That fact alone raises questions for asset managers as they’re stuck between making profits but also getting pressure to invest in ethically-conscious assets.
All in all it can deter investors from holding Bitcoin for long periods of time. It can also encourage governments to ban the practice of mining, as China has done.
Another factor to consider is the move to Proof-of-Stake for Ethereum and the significant drop in power consumption for its requirements, could that become the new gold standard for crypto.
4. Stablecoin Scrutiny
In an attempt to make crypto friendlier to people at large, stablecoins have been emerging. Their gimmick is to be pegged to real-world assets like fiat currencies. However there has been growing scrutiny around them too.
For example, tether, a stablecoin that ranks amongst the world’s largest digital currencies, has been pegged as a risk to the stability of the financial system.
Tether assures users that the tokens are backed 1:1 by US dollars. And while crypto investors use tether to buy crypto, some investors worry about tether not having enough dollar reserves. It’s already revealed in May that the company revealed that only 76% was backed by cash and cash equivalents.
Of that amount 4% is by actual cash and 65% was commercial paper, a type of short-term debt.
5. ‘Meme Coins’ And Scams
The final risk is the rising speculation in the markets to begin with.
Dogecoin, a coin that began as a joke to show how overpriced digitalized currencies can be, surged in price as retail investors looked to turn massive gains.
There was a period where dogecoin was valued more than Ford amongst other major US firms. It’s value now has significantly dropped.
There are other coins that have faced a similar fate, however another growing concern is the amount of scams arrive. Because crypto isn’t regulated fully there are several pump and dump activities that have emerged and have burned people.
The start of these scams will negatively impact the market as government will step in to protect retail investors similar to what they’ve done in 2018 with ICOs (initial coin offerings).