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Last year was one to forget for Bitcoin (BTC 0.20%) and cryptocurrency investors, as the market tanked amid rising interest rates. Investors weren’t that interested in risky assets in this type of macroeconomic environment.
But 2023 has been a different story. As of this writing, Bitcoin has soared 83% this year, better than the overall crypto market. Believers in this top digital asset might be thinking about investing. But can Bitcoin keep rising forever?
Bitcoin is characterized right now by strong momentum and renewed optimism. However, there are three key risks investors should know about to help temper their expectations a bit.
One of the most pressing risks is that more major countries follow in China’s path and ban their citizens from owning, mining, or transacting in cryptocurrencies, including Bitcoin. When China did this in 2021, there was a lot of uncertainty about Bitcoin’s future. After all, China is the second most populous country in the world with the second-largest economy, so any moves it makes can have sizable impacts.
But because Bitcoin is a global and decentralized network, when a large nation like China bans it, miners are free to move to any other jurisdiction where it’s legal. Bitcoin’s hash rate, which measures the amount of energy securing the network, has increased significantly since the China ban caused a temporary dip, a clear indicator of Bitcoin’s resilience.
What about the U.S.? Gary Gensler, chairman of the Securities and Exchange Commission (SEC), and Jerome Powell, chairman of the Federal Reserve, have both publicly stated there are no intentions to ban Bitcoin domestically. That provides some relief, although this stance can change in the future for whatever reason.
But as Bitcoin’s market cap grows, I think the possibility of this happening diminishes. We’ve seen greater interest from institutional investors to launch Bitcoin-focused products for their clients. And as a higher number of wealthier Americans generally, and those who donate to political parties more specifically, start to add Bitcoin allocations to their portfolios, it’ll be even more difficult for regulatory authorities to ban it. Moreover, if the U.S. bans Bitcoin within its borders, there’s a bigger risk to the country falling behind when it comes to innovation.
The SEC recently filed lawsuits against Coinbase and Binance for failing to properly register their exchanges with the agency. And this follows a string of high-profile failures of crypto firms in 2022. Cryptocurrencies have long operated in a regulatory gray area, but as governing bodies develop clearer rules to protect consumers, the industry could face a harsher reality.
This risk somewhat builds on the prior one I discussed. The safest way to buy Bitcoin is through a major exchange like Coinbase, Binance, Kraken, or Gemini. But these are centralized organizations that have to abide by the rules of the jurisdiction they are in. And if a country decides to shut down these key on- and off-ramps into digital assets, there could be limited ways for individuals and institutions to buy Bitcoin, thus reducing demand and potentially the price.
There are some real-world use cases for Bitcoin as a medium of exchange, like for low-cost and instant remittances. Many bulls argue this is Bitcoin’s ultimate goal, but it could be decades away.
This means Bitcoin’s main purpose right now is to become a more popular store of value, or an additional asset to own in a diversified portfolio. Investors can view it as a digital version of gold. Or they can simply own a tiny amount of it as a venture-style bet, hoping it skyrockets in value given enough time.
Bitcoin’s current market cap of $600 billion is just 0.01% of the total estimated wealth in the world. Even if this crypto commands just 1% of the world’s wealth, it has a sizable expansionary runway.
That’s not a sure outcome, though, because interest from individuals and institutions could simply not take off as many expect. Maybe they stop believing in Bitcoin, or they think the risks are too high, or another compelling digital asset comes along. This scenario is a possibility.
Bitcoin has been on a tear in 2023, but investors need to be mindful of potential downside factors.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.
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