The markets still rise and fall with Bitcoin, and this latest cryptocurrency crash centered once again around China is no exception. While proponents of this store of value may remain hopeful as to an eventual price recovery, there’s a few glaring concerns about Bitcoin’s fundamentals that may be lingering in the back of the minds of any investor honest enough to admit such.
1: What If Scaling/Lightning Is Priced-In But Never Works Out?
Long ago, at the resolution of the block size wars, Bitcoin became locked into a hard 1MB block limit as the ultimate ceiling to its scaling potential. This was done under the general idea that on-chain scaling would be infeasible or would create too great of a compromise in the decentralization of the network. Years later the network remains at capacity, and much-vaunted solutions such as the Lightning Network stagnating. There still remains a significant degree of underlying uncertainty as to whether Bitcoin will ever scale as it is now.
The more troubling part is, what if the present price of Bitcoin reflects in some part belief that Lightning will indeed eventually become functional? What if it never effectively scales, and much of the price is made up of investors who believe that it will, but will give up at some point with no real progress made?
2: What If Store of Value Isn’t Enough Utility to Justify Price?
Particularly as a result of the above, the narrative behind Bitcoin shifted over time from utility as a payments system and decentralized money to utility as purely a store of value. This is now considered its primary use case, as an investment that will reliably increase in value long-term. Since then, we’ve seen some pretty epic price dumps over the past couple years, including the present cryptocurrency crash, drawing out the time needed for a buyer to barely break even on their investment, let alone watch it grow. While a spectacular price turnaround may be in the cards for the near future, the question remains: What if long-term value growth requires utility, and what if Bitcoin’s utility in storing value isn’t sufficient to justify its price? Similar to the scaling question, much of the asset’s current pricing may be wrapped up in the idea that it is good at storing value regardless of whether or not it actually is. A shift in this belief without underlying fundamentals could be worrisome.
3: What If China Is a Bigger Decentralization Issue Than We Thought?
Finally, we go back to the go-to concern around Bitcoin: China. For many years in a row, the infamous headline “China Bans Bitcoin” has taken its momentary toll on market prices while the more educated among us rolled our eyes. No, China hasn’t banned Bitcoin, and it’s a global fully-decentralized system that doesn’t rely on one country anyway. Or so we keep telling ourselves. Yet year after year, headline after headline, the same thing keeps happening, without the diminished effect to be expected from a boy who cries wolf.
However, research has shown an overwhelming majority of infrastructure for the network may be based in China, and that an attack on major mining pools could threaten the entire network. What if the structure of Bitcoin’s security model has resulted in an inadvertent centralization of network power within an authoritarian jurisdiction with the power to seriously disrupt the network? What if the project’s decentralization and censorship resistance have turned out to be quite different than what was previously believed?