Bitcoin's performance was stable at the beginning of 2021, reaching an all-time high of nearly USD$65,000 in April. But in the first half, the price of this digital currency fell by about 47% from a record level, and some looming risks may cause further pain in the future.
Although supporters seem to hold Bitcoin temporarily, other investors are cautious about the violent market volatility and its impact on their investment portfolios. On June 1, market analyst Ryan Browne wrote an article that as time enters the second half of this year, cryptocurrencies face the following five major risks:
Increased Regulations Could Impact All Cryptocurrencies, Especially Bitcoin
One of the biggest risks Bitcoin currently faces is regulation.
Last week, the global crackdown on cryptocurrencies spread to the United Kingdom. British regulators banned the leading digital currency exchange Binance from engaging in regulated activities.
Simon Yu, co-founder and CEO of StormX, a cryptocurrency rebate startup, said that "over-regulation" of cryptocurrencies in the United States may become a problem. So far, the United States has not found a way to properly regulate the industry, which often makes it difficult for cryptocurrencies to operate.
High Volatility Can Be Good And Bad For The Price Of Bitcoin
Another big risk is that the prices of Bitcoin and other digital currencies continue to fluctuate sharply.
In April, on the first day of trading on the cryptocurrency exchange Coinbase, Bitcoin soared to a record high of around USD$64,829. Then it fell to USD$28,911 in June, briefly fell below 30,000 US dollars, and turned negative this year. It then rose back to more than USD$34,000.
People who are bullish on Bitcoin see it as a kind of "digital gold" – an asset that has nothing to do with broader indicators that can provide substantial returns in times of economic turmoil. However, while volatility may be a good thing when asset prices rise, it goes both ways.
At the same time, the tendency of traders who made highly leveraged bets on Bitcoin to be driven out of the market has led to sharp fluctuations in the price of Bitcoin this year.
Ross Middleton, the chief financial officer of the decentralized financial platform DeversiFi, said that volatility may actually be a huge attraction because prices can fluctuate significantly, which means that relative to the overall portfolio size, smaller configurations can make considerable profits.
Environmental Concerns with Bitcoin Cryptocurrency
Questions surrounding Bitcoin's environmental impact may be another major resistance faced by this cryptocurrency.
Bitcoin mining equipment requires a lot of electricity to operate, and Bitcoin's energy consumption has risen sharply in the past few years as the price of Bitcoin has risen.
Although Bitcoin's critics have long warned of its huge carbon footprint, Tesla CEO Musk put the issue back on the air this year.
But because of Bitcoin's "crazy" energy use and dependence on fossil fuels, Musk decided to stop Bitcoin payments, which subsequently disrupted the cryptocurrency market.
Citi analysts wrote in a research report earlier this year: “At least, this may prevent some investors from holding Bitcoin.” They also added that this may also stimulate government intervention and prohibit mining.
Stable Currency Review of Bitcoin
So-called stablecoins are also facing increasing scrutiny. The price of stablecoins is designed to be linked to real-world assets such as the US dollar.
Last week, Boston Federal Reserve Chairman Eric Rosengren stated that tether, one of the world's largest digital currencies, poses a risk to the stability of the financial system.
Tether insists that each of its tokens is backed by a 1:1 USD reserve, which is to maintain price stability.
Cryptocurrency investors often use tether to buy cryptocurrencies as an alternative to the U.S. dollar. But some investors worry that the issuer of tether does not have enough dollar reserves to justify its peg to the dollar.
For a long time, people have been worried about whether tether is being used to manipulate the price of Bitcoin. A study claimed that this token was used to support Bitcoin during the key price decline of Bitcoin's surge in 2017.
Speculation and Fraud with Cryptocurrencies
The increase in speculative activity in the cryptocurrency market may be another risk facing Bitcoin.
The cryptocurrency Dogecoin, which started as a joke, surged sharply earlier this year to reach a record high. The reason is that more and more retail investors are pouring into digital assets in search of premium returns.
For a while, the value of Dogecoin surpassed Ford and other major American companies, thanks in large part to the support of celebrities like Musk. Since then, its value has depreciated significantly.
Elsewhere in the cryptocurrency market, a decentralized financial token (DeFi) called titan fell to zero. Self-made billionaire investor Mark Cuban is a shareholder.
Simon Yu, co-founder and CEO of StormX: "Another concern is the number of scams that occurred throughout the year. We have seen a lot of hype and selling, and retail investors have suffered losses."
Bitcoin is one of the greatest inventions in history. Some people view it as a digital currency and some view it as digital gold. Some people believe Bitcoin is the Internet 3.0 in the future while some think it is worthless and will never buy it.
If you think you can bear these risks, you should start thinking investing in Bitcoin. However, it is also possible to see another 50% price drop in the future. Be prepared for it!
Different people have different views. However, it is your views and actions that will change your future, not other people’s. So, don’t let the “noise” distract you from making the right decision.