2017 was a wild ride for the cryptocurrency sector. Bitcoin shot past its all-time high of $1,200 and continued to climb at a frenetic pace, pulling every altcoin along with it. Investors and speculators watched in awe as the BTC/USD pair blasted through handle after handle, before running out of steam just before the $20,000 mark.
The biggest bull-run in history experienced a crushing sell-off shortly after that, with over $180 billion of market cap evaporating in just six weeks as the market tanked. While the catalyst for this price crash is still unknown, there is rampant speculation on the causes for the sell-off and the potential of another crash.
What does 2018 have in store for the virtual currency? Will the correction reverse and head for the moon once again, or will there be a black swan event that crushes the currency for good?
Here are five existential threats to Bitcoin in 2018 that could adversely impact both the BTC price and the entire cryptocurrency sector.
1) Unplanned Obsolescence
When Bitcoin first emerged in 2009, Satoshi Nakamoto designed it to be a decentralized currency with a distributed ledger. Bitcoin would enable, fast and direct peer-to-peer payments that required no bank to authorize. The technology blossomed, gaining support as it grew. However, as time passed, a few issues began to bubble to the surface.
The Bitcoin blockchain can handle up to 7 transactions per second. This statistic pales in comparison to the Visa network which can handle up to 56,000tps. The issue of slow transaction times comes from Bitcoins inability to scale.
In 2017, an upgrade to the network, known as Segwit2X, was proposed to the mining community. The upgrade would increase block size from 1MB to 2MB, efficiently solving the scaling problem. However, the Bitcoin community mostly dismissed the Segwit2X upgrade, and transaction times continued to drop.
The Lightning Network offers an alternative protocol to speed up transaction times. Nodes on the lightning network will set up payment channels between one another and occasionally settle on the blockchain. Average users will interact solely with the micropayment channels and use the blockchain only for cold storage and large transfers.
If Bitcoin does not receive the support it needs to implement the Segwit2X protocol or Lightning Network from the community, transaction times will continue to cost more and take longer to complete. This lack of scalability could eventually push Bitcoin into obsolescence.
2) Government Crackdowns
As Bitcoin gained traction during the 2017 bubble, governments and central banking authorities began to take notice. Governments receive tax revenue in their nominated fiat currencies such as the U.S. dollar and the Euro. Government legislation will be introduced to crush any financial instrument that poses a threat to collecting tax revenue.
The United States has already issued guidelines through the IRS stipulating the procedure for filing taxes on cryptocurrency profits. To date, the IRS has received very few registrations; this could lead to U.S. authorities clamping down on cryptos if the tax revenue is not declared and collected. The U.S. has also noticed the fraudulent trend of the white-hot initial coin offering (ICO) market and has made moves to warn the public about investing in these schemes. The CFTC has started to issue protection advisories against ICOs, as well as subpoena some of the prominent cryptocurrency exchanges.
South Korea, possibly the world’s largest crypto market, has also begun to implement KYC and AML protocols with exchanges. When South Korea launched their new legislation, the BTC/USD price plummeted, with volume drying up across all exchanges. South Korea has since declared that they will not ban cryptos or ICOs but demand that all exchanges use the KYC/AML protocols and all users must have a nominated bank account in their name.
Japan is an example of a crypto “safe-haven” where the government has not stepped in to curb the market. Japan announced Bitcoin as legal tender for goods and services in April 2017, a move that sent the price of Bitcoin soaring.
However, since the recent Coincheck hack, where over $530 million of the virtual token; NEM, was stolen, Japan has since declared that they will be considering tighter control and regulation of the cryptocurrency space. Global governments all appear to be moving for more regulation and improved legislation around Bitcoin and all other cryptocurrencies, if they cannot control it, they will squash it.
3) Fraudulent Tokens
Tether Limited created the first “Stablecoin,” a crypto-asset designed to help traders escape periods of high volatility in the markets. If price action becomes dangerous, traders can cash out their crypto balances into Tether. This ability to escape the market into “cash” or Tether, in this case, preserves their capital against violent market moves.
Tether (USDT) is pegged to the U.S. dollar at a ratio of 1:1. If the price of USDT differs between crypto exchanges, arbitrage bots and traders will take advantage of the trading opportunity, trading USDT back to parity with USD.
However, there is ongoing speculation and accusation by crypto enthusiasts that suggests Tether limited may not have the USD reserves needed to back Tether on a 1:1 ratio. If these rumors are proven to be true, then Tether could be the downfall of the entire crypto ecosystem.
The existential threat in USDT comes not from its market cap, but from its trading volume. Currently, USDT is the third most-traded cryptocurrency across all exchanges. This volume issue means that if someone were to pull the liquidity plug on USDT, there would be nowhere for traders to cash out and everyone left with USDT tokens will be a “bagholder.”
4) Price Manipulation on Exchanges
Spoofing, wash-trading, painting-the-tape, and quote stuffing are all examples of price manipulation tactics used by traders to artificially stimulate the price of an asset in a given direction. Some of the most significant crypto exchanges face accusations of using these tactics to manipulate the price of Bitcoin.
Exchanges such as Bitfinex allow wash-trading, a process of selling to your own orders. This tactic enables traders to create fake trade volume and manipulate the price in the direction that they desire. Spoofing is another favorite technique of traders used to create artificial volume. A trader will place a large order with the exchange and as traders enter the market; the order magically disappears as the trader withdraws it. All the traders are left exposed to a crashing price that fleeces their account.
It is important to note that there is no concrete evidence for these accusations. However, there are self-appointed crypto watchdogs, such as @bitfinexed, that have exposed the possible fraudulent operations of these exchanges.
Exchanges have always been the weak link in the crypto ecosystem, with many operating as ‘fly-by-night” bucket shops that are nothing more than scams waiting for a mark. The Mt. Gox hack of 2014 is a testimony to the effect exchanges can have on the BTC price. When thieves stole 850,000 BTC from Mt. Gox in the world’s largest crypto-hack, the price crashed almost immediately, sending Bitcoin back to the $200 handle where it would remain for the next three years.
5) Unregulated ICOs
The massively fraudulent ICO sector is cause for grave concern. An ICO is a process, much like an IPO, where a company will launch a token for pre-sale to investors willing to get onboard early. Unfortunately, many of these ICOs have been fraudulent, with the developers running off with investors’ money or creating a “pump-and-dump” Ponzi scheme that ends with disaster.
China was the first country to take official action against ICOs, banning them outright. The U.S. followed suit with the CFTC recently releasing its first public advisory against virtual currency pump-and-dump schemes. Facebook announced in mid-February that it would be removing all cryptocurrency advertising from its platform in response to the rampant fraud in the ICO sector.
Fraudulent ICOs continue to undermine the public’s confidence in the crypto ecosystem. Currency is merely a financial instrument, with its value derived from the faith of the fiat system that the government has created, and the people that use it.
The same is true for BTC and all other cryptos, they have no intrinsic value and receive their price based on the demand in the market. If ICOs continue to erode away the faith in the system, eventually it will fail.
Time Will Tell
An existential threat is an event or occurrence that threatens existence. In this case, the risks to Bitcoin and the crypto sector as a whole are genuine indeed. If any of these five scenarios plays out, the results could be disastrous for all virtual currencies.
Unfortunately, the decentralized nature of BTC and cryptos may be its downfall as a financial instrument. The lack of regulation and control in the crypto market is disturbing, with fraud and deception running rampant.
While the blockchain technology underpinning Bitcoin has tremendous value, virtual currency may not be the best application for it, time will tell.
