Anyone invested in bitcoin and other cryptocurrencies was in for a wild ride the past few weeks. Like the stock market crash of 2008, bitcoin holders felt a proverbial punch in the gut as they saw their virtual currency plunge considerably in the final weeks of the year. However, bitcoin and other cryptocurrencies are like bad weather. If you don’t like what is happening, wait 10 minutes.
As we start 2018, traders are seeing the relative stability they are used to experiencing as the value has popped back up to early December prices. It appears perhaps the predicted bubble burst has postponed its day of reckoning.
So how vulnerable is bitcoin to crashes caused by outside forces? There are numerous ways that bitcoin could fail as a digital currency. Exploring this further, here are some of the latest theories and predictions.
A fair amount of criticism reserved for bitcoin is the lack of any real value. Bitcoin is not tied to state currencies, natural resources, precious metals or any other hard asset. For this reason, many financial experts believe it is ultimately destined for failure.
This may be ultimately true, but don’t expect to see a sudden drop to zero – there are far too many interested parties involved for this reason to cause bitcoin’s demise overnight.
China & Russia
There has been a lot of speculation lately that China and Russia could conspire to crash bitcoin sometime in the next few years. This prediction is led by Saxo Bank as part of their annual outrageous predictions for 2018.
The theory is the two countries will collude to crash any cryptocurrencies that do not receive the blessing of either government, thus restricting bitcoin trading and mining through regulation in each respective country. Both countries would benefit by keeping more capital onshore.
There is a plus side to this theory if it were to somehow come to pass – Saxo also predicts bitcoin will hit $60,000 before the intentional crash is put into motion.
Excessive Transaction Fees, Slow Processing Times & Environmental Impact
Fees for bitcoin transactions have increased significantly in the past month due to the dramatic increase of bitcoin investors. Technological limitations prevent bitcoin from processing transactions at a faster rate. Current transaction rates are roughly four per second. This seemed to be adequate before the new investors arrived and more businesses began accepting bitcoin as a form of payment.
Bitcoin was the first cryptocurrency built on the blockchain, and inevitably, newer cryptocurrencies came along and took advantage of bitcoin’s weaknesses. New chains from hard forks, such as Bitcoin Cash, are able to process transactions more efficiently by allowing bigger block size (8 megabytes vs 1 megabyte.) The general consensus is bitcoin’s maximum capacity is somewhere around 7 transactions per second, therefore, Bitcoin Cash can process roughly 8 times more transactions than bitcoin, all things considered equal.
Environmental concerns are also beginning to plague bitcoin. The processing power required for bitcoin transactions is far greater than the computing power required for other digital transactions such as credit card payment processing. The energy required for bitcoin mining will continue to increase with demand over time.
Other cryptocurrencies are slipping under the radar while bitcoin takes the brunt of bad press. Major publications such as Newsweek have printed articles with headlines such as “Bitcoin Mining on Track to Consume All of the World’s Energy by 2020.”
The total number of bitcoin holders is unknown – as someone could have multiple wallets – but there is speculation that up to 40% of bitcoin is in the hands of less than 1,000 investors. Because bitcoin’s value is based almost entirely on economic principles such as scarcity and supply and demand, groups can manipulate prices by transacting in large quantities. Whales selling large quantities at once when the price is high can cause panic and a widespread selloff by other investors.
On several occasions, hackers have created heartache for bitcoin users. Mt. Gox is historically the greatest example of how bitcoin can be stolen from the wallets of traders. There is also the mess with Bitfinex. A hack in 2016 robbed bitcoin owners of $72 million. As recently as December, Bitfinex has been hit by DDoS attacks, which will likely continue for the foreseeable future.
There are many tips for keeping your bitcoin safe from hackers. Unfortunately, hackers can wreak havoc on investors by hacking exchanges where soft wallets are stored.