Critics of cryptocurrency come in various forms. Some argue from a financial standpoint, doubting the sector's ability to sustain growth in the long haul. Others focus on the technology itself, dismissing it as a trend and claiming that blockchain isn't the universal solution it's often touted to be. Then there are traditional institutions, like banks, wary of crypto's potential threat to their longstanding control over the global financial system. government fear mongers , who are anxious about investors getting fleeced on their watch or their potential tax revenues slipping away unnoticed. .
These prophets of FUD (The infamous fear, uncertainty, and doubt that permeate the crypto culture) serve an important role in keeping market exuberance in check, functioning as a counterbalance to some of the more extravagant claims about blockchain's capabilities.
However, black swan events stand apart entirely. In the crypto world, these events epitomize the darkest outcomes imaginable—catastrophic and unredeemable.
Why factor black swan scenarios into your calculations? While everyday skeptics provide a reality check to keep optimism grounded, those predicting black swans take it to another level. Their role is to assume a complete market collapse that necessitates either a fresh start from scratch or perhaps moving the goalposts entirely. It's akin to a homeowner installing a fallout shelter—unlikely to be used, but comforting to have just in case.
Consider these doomsday possibilities as cryptocurrency finds its footing in a maturing market.
A Black Swan Event
To grasp what a black swan means, it's crucial to understand its origins. Coined by financier and author Nassim Nicholas Taleb in the wake of the 2008 financial meltdown, a black swan denotes a calamity that's unforeseen yet immensely impactful.
Taleb emphasizes that the term is relative. It's not always about earth-shattering events like meteor strikes or volcanic eruptions. A black swan could be a localized disaster—devastating in one domain but potentially lucrative in another. For instance, should the crypto industry implode, it might create opportunities elsewhere in tech or finance. The scenarios we'll examine have the potential to ravage the crypto sector without necessarily affecting the broader world. Their consequences would mainly unfold within digital currency circles, yet their impact could still be devastating.
The Regulatory Hammer
Currently, Bitcoin and its crypto counterparts occupy a legally ambiguous space, with minor advances toward regulating cryptocurrencies in the U.S. The establishing tax regulations around cryptocurrency albeit on terms that lean towards heavy taxation. The U.S. Securities and Exchange Commission evaluates the security status of each cryptocurrency case by case.
Nevertheless, sweeping regulatory enforcement hasn't yet come down hard on the crypto industry. A large number of exchanges exist in a sort of Wild West, minimally constrained by government oversight. Regulatory discussions often revolve around whether these platforms might be outright banned.
Could Governments Ban Bitcoin?
This sets the stage for a potential black swan scenario: a crushing wave of regulations descending simultaneously on key global markets. Suppose both the U.S. and South Korea were to impose strict controls over cryptocurrencies—it would send ripples of uncertainty through the entire market.
Worse yet would be a sudden shutdown or prohibition of exchanges, potentially freezing vast sums of digital assets.
This particular scenario ironically contradicts the initial vision of Bitcoin's creator for a stateless global currency. As most of the crypto economy's wealth is tied up within exchanges rather than private wallets, a concerted clampdown on fiat gateway exchanges—critical for users without specialized mining hardware—could lock the market in a chokehold. Satoshi Nakamoto Critics argue that Bitcoin has weathered previous restrictions, like those from China. However, China's test case is problematic due to its centralized control and unique market behavior. A crackdown in the U.S. or South Korea might be far more damaging.
Another conceivable catastrophe for cryptocurrencies could manifest as a grave vulnerability within the source code being discovered and exploited. This has occurred with smaller currencies like Verge, which fell victim to
Catastrophic Code Failure
exploitation that allowed attackers to mine low difficulty blocks and siphon millions of dollars. Smaller coins are often alarmingly susceptible to 51% attacks. a malicious attack The Quantum Threat: Will Quantum Mechanics Undermine Bitcoin? we recently covered .
Experts caution that quantum computers, with their unparalleled processing capabilities, could compromise Bitcoin's cryptographic safeguards within the coming decade. Quantum computing is on the way :
Nonetheless, with Bitcoin's robust track record against attacks, it's likely solutions will be in place before such a threat materializes.
Given its digital essence, Bitcoin is naturally vulnerable to potentially disastrous technological assaults. These could range from massive hacks targeting exchanges to potential terrorist activities bankrolled by Bitcoin—both of which could heighten legislative or political efforts to snuff out digital currencies.
Hacked and Forked
One must also consider other technological threats lurking in the shadows—like the fork phenomenon.
Forks involve intentional alterations in a cryptocurrency's protocol, resulting in various versions of the coin with tweaks to its code. Many suggest that if Bitcoin or similar currencies fragment without a cohesive strategy, they could spiral endlessly into numerous insignificant projects. Conversely, a fork could arise that surpasses the original, gaining dominance over Bitcoin.
Read our Guide to Bitcoin Forks
Such fragmentation risks diluting the market. Successful forks siphon off funds initially intended for mainstream coins, complicating adoption efforts. Envision the chaos if each U.S. state minted its own currency, mimicking early American issues only resolved by a unified national currency. Bitcoin Cash champions are hoping for.
Similarly, repetitive forking of Bitcoin or major cryptocurrencies into myriad variants could splinter market share, impeding mainstream acceptance and inviting trouble from governments, financial establishments, and other negative forces.
The very essence of black swans is their unpredictability. However, their market-altering potential justifies pondering them. Taleb urged this scrutinizing mindset to pinpoint potential vulnerabilities within a market. It's about expecting the worst while thriving on crypto's transformative promise. Yet, the terrain remains uncharted, risking calamity if certain pivotal events align—be it stringent regulations, debilitating hacks, uncontrolled forks, and more. Acknowledging black swan potential can arm investors with foresight. After all, the lesson in crypto remains: brace for the unexpected.
Most Unlikely Predictions
Blockonomi's Editor-in-Chief and founder of Kooc Media, a U.K.-based online media platform. An advocate of Open-Source Software, Blockchain Innovations & an Equitable Internet for everyone.
References
- https://www.investopedia.com/news/black-swan-risk-cryptocurrency-markets/
- https://www.independent.co.uk/news/business/news/bitcoin-bubble-investment-value-cryptocurrency-burst-digital-boom-currency-a8086256.html
- https://www.investopedia.com/terms/b/blackswan.asp
- https://www.reddit.com/r/Bitcoin/comments/6x4rpj/what_is_the_most_likely_black_swan_event_for_btc/
- https://enablon.com/blog/2016/07/12/3-ways-to-be-better-prepared-for-black-swan-events
- http://www.businessinsider.com/9-black-swan-events-that-changed-finance-forever-2016-10
