What is bitcoin?

Bitcoin is designed to decentralise the global financial system and to democratise the way we live. Bitcoin is changing the way people store value, and it is seen as one of the best ways of safely storing energy accumulated from work, goods, and assets. It is unique in that its founder is unknown and nobody can dictate where it goes next. In order to fully understand the potential of Bitcoin, we need to look into the risks associated with its integration into society.

When Bitcoin was first launched, very few people knew what it was, and even fewer can predict what it will ultimately become. The creator, under the pseudonym “Satoshi”, published a scientific report that proposed a system of online payments that “would allow online payments to be sent directly from one party to another without going through a financial institution”. The goal was to replace the banking system. Now, Bitcoin can be used as a currency, but there are many risks associated with it. Michael Saylor suggests that Bitcoin is the safest way to store value in the long run, acting as a store of value. This is the most reasonable use for Bitcoin currently. It has started the process of decentralising finance, enabling anyone to become part of the financial system, even those without bank accounts and identification records — essentially democratising finance.

The volatility of Bitcoin

The volatility of Bitcoin is a common fear that deters people from investing in it. However, since its origin in 2009, the value of Bitcoin has gone up each year. It is one of the most unstable assets in the world, yet it is also the most valuable. Bitcoin is no longer just used as a form of transaction, but it is now seen more as a store of value, similar to gold. If you invest in Bitcoin now, and hold it for 3–5 years, you are very likely to make a profit. Despite its short-term volatility, the value of Bitcoin has been rapidly increasing.

Protecting from theft

“Someone can take your login credentials, or wallet information”. That should not be seen as the risk of bitcoin, it is the risk of any asset of choosing a safe storage method.

Regulation risks

No matter how powerful a nation may be, such as China or the United States, they cannot regulate or remove the Bitcoin system. However, individuals and organisations can be subject to regulations in various ways, such as through centralised and decentralised exchanges, banks, and wallet addresses. Additionally, internet traffic can be monitored and regulated.

Technology dependency

It is true that Bitcoin is dependent on the Internet in order to exist, and it is not supported by a physical asset. However, it is actually backed by a network of peers, and it is highly improbable that the Internet would suddenly vanish.

Limited use

It may not be possible to use Bitcoin to purchase a beer at all restaurants yet, but it is possible to use Bitcoin as a store of value, similar to a gold bar. To do this, you can use services like Visa cards backed by crypto-supporting banks or exchanges.

Financial loss

Since its inception on the official “Bitcoin market” in 2010, the value of Bitcoin has increased exponentially from 0.X to X0.000 dollars. People and media often refer to the rapid rise in value as “a bubble” or “tulip mania”. Investing in Bitcoin carries a significant risk as the value can be volatile. If one were to purchase Bitcoin at its all-time high (ATH) and then sell at its lowest point, it would result in a financial loss. However, if one were to wait for 4–5 years, it is likely that profit would be made. New regulations and laws may create additional challenges when it comes to storing and trading value in Bitcoin. It is possible that it may become illegal or more difficult to trade or possess in certain countries.

Illegal activities

“Bitcoin is used for illegal activities”. So is gold, so is cash, so are banks. Government need to implement bitcoin in their societies instead of making all citizens criminals. For example, China forbids crypto currencies, and it has never been a proponent of democratisation and decentralised rule.

Risk for countries

“Bitcoin will replace the national currency with bitcoin”. Since bitcoin is not always tied to personal identity, it could be more difficult to collect tax. But not if government integrates bitcoin into their systems.

Risk for banks

“Bitcoin replaces banks when it comes to storing value and transacting money”. Other crypto-currencies and assets help replace the functionality of banks when it comes to exchanging, lending, and borrowing money. For example, see projects such as Aave or Uniswap.

Main risks for people

The price value of bitcoin declines, (it happens occationally), forgetting or losing the wallet keys, people losing access to exchanges.

New regulations and laws could potentially make it more difficult to store and trade value in bitcoin. It could become illegal or more difficult to trade or possess

Bitcoin facts

Bitcoin is a cryptographically secured, trustless, open-source, a peer-to-peer system aimed to give individuals decentralized power over banks.

Bitcoin is a store of value.

There is only one Bitcoin blockchain. However, many other early coins were built inspired by bitcoin code that has their own separate blockchains (Litecoin, Ethereum, Monero).

Bitcoin is sent between wallet addresses using apps.

Bitcoin is scarce, and there will never be more than 21.000.000 original bitcoins in existence.

Bitcoin can be divided into 8 decimals, meaning you can own 0.0000001 bitcoin. In the Blockchain analysis, Jake Levison (2020) claimed that: “If you own 0.28 BTC, you’re statistically guaranteed to be in the richest 1% of the world in BTC terms”.

The big risks and potential pitfalls of the Bitcoin system

Satoshi sell all BTC: One of the biggest risk of bitcoin is when of if Satoshi Nakamota reveal their identity or if they sell their ownership of approximately 1 million bitcoin, this would disrupt the market for a very long time and potentially move Bitcoin into perma-winter.

Bitcoin mining energy: Bitcoin relies on Proof-of-work and the cost of energy is very high. The climate change is happening, and the only way forward is if bitcoin mining is regulated to only use renewable sources of energy. This can also help disrupt and innovate renewable and cheap sources of energy.

Bad brand reputation: There is a risk of Bitcoin becoming the brand of immorality and the decline of humanity, or it becomes a vessel for billionaires, oligarks, villainous countries to place flee regulations and taxation.

Bitcoin is controlled by the richest: It becomes the problem that is was supposed to solve. Bitcoin could lead to some sort of unregulated ultra-capitalism. It is not a good thing when the richest few are owning most of the bitcoins, and a few numbers of persons or organizations acquiring too many bitcoins. Let’s say institutions, governments, rich individuals, and bankers buy all bitcoin, then the world could end up less democratized - the same as today. Then, Satoshis vision would be worthless.

A Miner 51% attack: An attack on a blockchain by a group of miners who control more than 50% of the network’s mining hash rate. Attackers with majority control of the network can interrupt the recording of new blocks by preventing other miners from completing blocks.

A faulty bitcoin core: The bitcoin core changes to a bad version that is not detectable for many years, this happened as programmers inserted malicious code in a open-source project to make a political statement — so called “protestware”.

Bitcoin take-over: Bitcoin taking over the role of the dollar in the global market. This could lead to war, crisis, and political revolutions and this is a risk for all.

Don´t be too late! Bitcoin is decentralized and unstoppable, so it is only possible for governments to slow down its adoption. The best way forward for any nation would be to quickly adapt and integrate bitcoin with just regulations in place.