There are many types of cryptocurrency critics. There are tech critics who believe that cryptocurrencies are a fad, and that blockchain is not the panacea it seems to be. There are financial bears who don’t see the market’s long-term growth potential. There are established interests, such as banks, that are concerned about cryptocurrency’s potential to overthrow traditional monetary systems.
Fear Factor
There are government fear mongers who are concerned about investors being scammed or tax money falling through their fingers. These crypto-meme prophets of fear, uncertainty and doubt all have their place in a functioning market. They act as a devil’s advocate and check on some of the more outrageous claims about blockchain technology.
However, the black swan is a different kind of event. A black swan event in Bitcoin or cryptocurrency is the worst-case scenario, and it can be devastating and irreversible.
Why is it important that black swan scenarios are considered? Black swan forecasters work like a rototiller, while the FUDsters provide an adequate level of market pruning. Their job is to assume that the market will collapse and to make it possible to rebuild the garden or move it elsewhere. It’s like the homeowner who puts a fallout shelter into their basement. It’s helpful to be prepared for the worst. Although it is unlikely that it will ever be required, it is a great resource.
Here’s a quick overview of some of the most dire scenarios that cryptocurrency might face as it matures.
A Black Swan Event
Let’s first define what a black Swan is and what it’s not. The term is a derivative of the name Nassim Nicholas Taleb, author and financier. Taleb described a black swan as an event that is completely unpredictable and has devastating consequences, when he wrote about the 2008 financial crisis.
Taleb said that the idea is relative. A black swan event does not necessarily mean a meteor strike, or a volcanic eruption that causes all things to be disrupted equally. A widespread failure in cryptocurrency would, for example, open up opportunities in other financial and technological sectors. It can be localized. One market’s black Swan may be another’s gold goose. It is only a crypto-related black swan. These are events that would be catastrophic for the crypto sector, true black swans. They don’t necessarily involve an occurrence that would shake the entire world or the financial markets. These events would have significant ramifications that are largely restricted to the cryptosphere but would still be devastating.
The Regulatory Hammer
Bitcoin and other cryptocurrency operate in a gray legal area at the moment. There have been some tentative steps towards regulating cryptocurrency in the U.S. Although the tax laws surrounding cryptocurrency have been clarified, there has been some heavy taxation. The U.S. Securities and Exchange Commission left the question of whether cryptocurrencies are securities to be decided on a case by case basis.
The real hammer has not yet fallen on the crypto industry. Most exchanges operate in an extralegal environment that is not subject to government oversight. The main regulatory news around exchanges has been about whether they will be banned.
Governments
Are Governments able to Ban Bitcoin? This sets up the first big black swan scenario, which is an extreme and crushing level of regulatory pressure on several major markets at once. It would be a chilling event if, for example, the U.S. and South Korea decided simultaneously that cryptocurrency should be tightly regulated.
A worse scenario is the immediate closing or outlawing exchanges, potentially resulting in millions of dollars in collective assets being frozen.
Ironically, this scenario is contrary to Satoshi Nakamoto’s original vision of a global currency without borders. The majority of the wealth in the cryptocurrency market is held in exchanges rather that private wallets. Therefore, fiat gateway exchanges are the only way for computer users to enter the market without ASICs for advanced miner. This would cause the market to be closed down.
Critics point to Bitcoin’s survival from past bans, such the one that China previously imposed. China is a notoriously poor test market due to its high central government control and its unpredictable market dynamics. A freeze in the U.S.A or South Korea could be even more disastrous.
Catastrophic Code Failure
Another possible Black Swan event is a bug in a Cryptocurrency’s code that could be exploited. This has happened recently with smaller currencies such as Verge. A malicious attack allowed hackers to mine extremely low difficulty blocks, siphoning off millions of dollars. 51% attacks are also very easy to execute on smaller coins, as we have seen.
Quantum Computing
What threat does it pose to Bitcoin? Although it is unlikely that this will happen to Bitcoin, a scenario in which Bitcoin was successfully exploited could lead to billions of dollars being stolen and the currency plummeting. Quantum computing is possible, although it is not currently possible.
Security experts predict that the quantum computers’ massive calculating power will be able break Bitcoin security in 10 years. Bitcoin has shown its resilience to attacks numerous times so a solution must be found before this happens.
Hacked and Forked
Bitcoin’s digital nature makes the currency vulnerable to technological attacks that could endanger its currency-ending nature. This could be a hacking of an exchange, or a terrorist attack funded with Bitcoin. It can bring on intense legal and political pressure to end the nascent digital currency.
There is also the possibility that a more sinister technological foe could be the common fork.
Bitcoin Forks
Check out our Guide to Bitcoin Forks. Forks are often planned deviations from a cryptocurrency project that produce slightly different versions with slightly different code. Some argue that cryptocurrencies such as Bitcoin can be literally forked to death. If there is no central cohesiveness in the project, it could lead to the project being split into many smaller and ultimately irrelevant projects. This can also lead to a fork that is championed above the mainstream Bitcoin currency and ultimately takes the lead, which is what some Bitcoin Cash champions hope for.
Market dilution is the danger. Even if the forks succeed, they reduce the amount of cash available for legacy coins that have been adopted. States can now mint their own coins. This was a problem at the very beginning of the United States. Imagine the frustration caused by each of the 50 U.S. nations. This was only fixed by the creation of one national currency.
Similar to Bitcoin, or any other major cryptocurrency, it could be forked and reconfigured into a thousand variations, each controlling a small portion of the market. This would hinder adoption and open the field to pressure from government regulators as well as financial institutions that are more established than others, bad actors and other undesirable actors.
Most Unlikely Predictions
Black Swans are by nature difficult to identify in advance. It is worth spending time contemplating possible black-swan Bitcoin events. Taleb advocated this devil’s advocate view to identify potential market weakness. They are, by definition, market-shattering. It’s a variation on the “prepare to the worst” mindset. Although the potential and enthusiasm for cryptocurrency are high, it is important to remember that the market remains young and untested. If just a few key events happen, it could spell disaster. Investors can be a bit more realistic by keeping in mind the possibility of a black-swan event. We have learned one thing from the cryptocurrency market: Expect the unexpected.