Technical risk at the protocol level
If a clever hacker was able to take down the Bitcoin network or award himself everyone’s bitcoins that would shake the belief that Bitcoin could work at a technical level. I actually think this one is the least dangerous/likely to happen. There are some very smart people working on the core protocol that take their job very seriously. Bitcoin protocol development is much more similar to aerospace software development rather than building the next Quora.
Technical Risk at the infrastructure level
There have been numerous hackings at the infrastructure level in Bitcoin
Mt Gox lost $420MM in users funds
Bitfinex was hacked for ~$60MM
Bitpay was social engineered ~$2MM
Everyone time one of these massive hacks happen, Bitcoin crashes. You can’t really predict when someone is going crack a companies software infrastructure, but it is a real risk in public sentiment of bitcoin. These hacks will continue, overall cyber security is still in it’s infancy — I’m optimistic that Bitcoin will force a lot more companies to take their security infrastructure seriously since there is actual money at risk.
Regulatory Risk
This is the one that scares me the most with the ongoing war on cash. Governments are trying to restrict the flow of money by banning large bills of currency. This does not bode well for a Bitcoin — billed as digital cash. Check out this infographic for more information on the war on cash. Bitcoin is engineered to be censorship resistant — similar to how cash is censorship resistant. The best way governments can censor cash transactions is to force people to transact in LARGE quantities of cash. It is much easier to detect $1MM in $20 notes compared to $1MM in $100 notes. Similar to how goverments are banning cash, they can try to ban bitcoin. The effectiveness on this ban at a technical level is rather futile. However affecting public sentiment of cryptocurrencies is a valuable tool and will most likely stifle acceptance of them. Will this cause them to crash in price? Possibly, it may also have the opposite effect.
The Future
Despite this bearish blog post I just finished writing, I think the future is rather bright for Bitcoin. There are many people working on contracting applications, enhancing privacy and scaling Bitcoin at the technical level.
At the infrastructure level we are seeing more legitimate businesses get involved with Bitcoin who are taking their security procedures much more seriously than the early businesses in Bitcoin.
This leaves us with the regulatory risk. I think this is the biggest risk in Bitcoin right now, hopefully some smart people (who I don’t know about) are working diligently to solve this problem!
Over the long term though, I think Bitcoin will continue to add value to it’s users with faster, cheap, uncensorable transactions while reducing trust between counterparties. I wouldn’t count on a 5 year bear run any time soon.
