Bitcoin has upside potential, but it’s helpful to be mindful of the downside


It is always preferable to have a positive attitude about all things in life, but when it comes to investing, unfortunately, you must be aware of your potential downside in all situations. At those times, it is necessary to put the old “negative” hat on and decide what might make your world an inhabitable place and how to prevent that scenario from ever happening. In many ways, Bitcoin requires one to be extra negative at times, just to make sure that a major surprise does not come out of the blue and spoil your day.

For anyone that has followed Bitcoin’s path over the past few years, it is not overly aggressive to foresee a significant upside move, setting a new All-Time-High (ATH) somewhere above $20,000. Bitcoin may seem stuck at the moment, ranging above and below $10,000 at times, but it has so many fundamental drivers working on its behalf in the background that it is difficult to see if any downside risks truly exist.

Risk, however, never sleeps. It can come in many forms, but there will always be the possibility of a major downward thrust, defying logic and traditional technical analysis, but it can happen in an instant. No less than two Nobel Laureate economists and a host of other critics have lambasted the world’s favorite digital asset, but just for the record, it might be prudent to remind ourselves of three potential scenarios that are lurking in the shadows.

So what could happen in the crypto-verse to destroy Bitcoin, and how does one prepare themselves for the worst? Pedro Febrero at Coin Rivet recently discussed the following three hypothetical situations, starting with this as statement an intro:

The topic of how to kill Bitcoin is not new. It has been addressed in the past by academics, researchers at MIT, and practitioners such as traders and cypherpunks. It is an interesting abstraction exercise to think about in order to consider how resilient Bitcoin must become in order to avoid such dreadful ends.

Government Intervention and Takeover

In this case, several governments decide to intervene with bans on production and distribution, but the plan is more insidious than just this action. The governments would also want to takeover the system by having their central banks intervene by buying up available BTC. It may sound outlandish, but if you prevent people from having access, values could plummet, while governments collect the excess and eventually shut the system down.

Major Security Breach

What if the beloved blockchain technology has a major security compromise, where crooks issue major amounts of BTC to themselves? In other words, the existing upper cap would be removed, thereby diluting current valuations before any corrective action could be taken. This kind of hack would more than likely come from a government that, again, wanted to shut the system down. A hack of this nature would destroy confidence and values over night.

Scalability Failures

In this scenario, transaction volumes become so heavy and unwieldy that the system fails and cannot keep up. It freezes in place, so to speak. If the system could not process even the basic of daily volumes, supporters would have to go elsewhere. Bitcoin would lose its grip on the market, and values would plummet, a slow and painful “death by lack of scalability”.

These are but three highly unlikely storylines, each of which could have disastrous consequences. Are there other “storylines” that could swing the tide of support that Bitcoin currently enjoys? The simple answer is “Yes”. Regulators and central bankers have sworn “vengeance” for Bitcoin’s “hubris” in the market, but Bitcoin did not perish, nor go away. It is stronger than ever, but from a size perspective, it is still a minor player in the scheme of things. Bitcoin’s market cap is nearly $180 billion. Gold reserves are said to be $6 to $8 trillion. Global debt is just under $250 trillion.

Bitcoin is, excuse the pun, still a “bit” player. If it does get too big, too fast, however, a few governments could step forward to stop what many of them call “madness”. Having said that, these scenarios are highly unlikely. In fact, Mr. Febrero then concludes:

Although the above scenarios are fun to discuss, I personally doubt they will ever happen. I personally see Bitcoin avoiding all attacks coming its way. What doesn’t kill you only makes you more resilient. So no, Bitcoin won’t likely be killed that easily. What this beast has shown us is that it can sustain 90% drops and recover in the blink of an eye. As long as Bitcoin remains resilient, the revolution will continue.

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Bitcoin has upside potential, but it’s helpful to be mindful of the downside


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