Having previously mentioned just why Bitcoin is a major technological innovation in currency, as well as why the media notion of it being shady- the currency of smugglers and reprobates, is just incorrect, I thought I would now turn to some of the risks.

It is worth noting, that quite recently I downloaded the Blockchain just to understand how large it had become- the blockchain is the ledger indicating all transactions on the network ever carried out.  The growth of it appears to be more or less exponential since 2009:

download (1).png
While rather difficult to see properly, this general trend shows the total cumulative bitcoin transactions since 2009 to present.  The trend should be clear.  An interactive list of live transactions can be seen here.

Aside from the frequent exchange scandals which have become part of the Bitcoin landscape, there are multiple risk factors associated with Bitcoin.  While the exchange scandals in themselves are not a huge issue for the cryptocurrency (you can store your coins in a secure electronic, or even paper wallet), there are other risks which are worth  stating.

It is worth noting that from a financial perspective, anyone who understands the nature of seniorage understands that Bitcoin flirts with awakening the wrath of governments in addition to bankers globally.  While I believe it is innovative, I don’t think that it could sustain a global attack against it. The resources (and technological capital) which could be levelled at the cryptocurrency are tremendous.

Regardless, here are some risk factors, and chinks in the cryptocurrency’s armor.

Bandwidth:

During the events of the Arab Spring, which I witnessed first hand, it wasn’t uncommon to have municipalities choke the bandwidth of the local internet connections down to a crawl in order to restrict the flow of information.

While the West enjoys some additional protections under the legal system, it would be the ultimate way to shut down capital outflows, if Bitcoin transfers became a risk.  Aside from that, even with regular bandwidth, it is likely that Bitcoin transfers may be bounded at the upper limit by the speed of the connection.

Blockchain Storage:

There is, of course, a possibility that at some point the blockchain will outstrip growth in personal data storage capabilities, to the point where it may becoming increasingly centralized, invalidating one of the core principles of the cryptocurrency.

Not Invincible When it Comes to Attack:

When it comes to Bitcoin’s encryption, it is not invincible to attack. The way Bitcoin has been designed, it encourages individuals (or organizations) to make it unprofitable spoof the participants in the chain.  This incentive keeps fraud to an absolute minimum.  However, while it would require a huge amount of computational power, it is plausible that a body with essentially endless pockets (hint, hint) might go scorched earth on the cryptocurrency, even if it meant burning through resources to do so.

Erosion of Trust:

The Blockchain is built with economic incentives in mind so that trustless, anonymous individuals can easily transfer Bitcoin in a safe environment, however, public perception and actual fact are two different things.  It is plausible that a massive smear campaign, or a coordinated attack on the Blockchain could destroy faith in the currency to the point where vendors refused to take it.

There also might be hidden ways to exploit the network that no one has found yet.

Competitor Cryptocurrencies:

As with anything in the tech. space derivative technologies and new and improved versions will come out, meaning Bitcoin may eventually fall by the wayside. And of course, should a competitor be “anointed” by the powers that be over Bitcoin, a preferential tax status, or lower risk environment could be maintained over Bitcoin’s.

Purchase of the Exchanges:

He who controls the exchanges, controls the network, so to speak. It’s entirely plausible banks will buy up common exchanges as nodes to funnel the cryptocurrency holders through the conventional banking system, meaning it would no longer be autonomous.

Summary:

All in all it IS and innovative and exciting technology, but anyone who “invests” or utilizes it needs to understand the risks as well. As past experience has shown, there is an asymmetry between investment losses and gains- gains can be accumulated over decades and lost in a very short time horizon.

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