This Is What Could Pop the Bitcoin Bubble

Bitcoin and bubble have become virtually synonymous in the minds of many skeptics during this year’s breathtaking rally. While the digital currency has defied doomsday prophesies, there’s a number of ways this party could end badly for the swelling ranks of bulls. 

But be warned: many of the potential causes of death have surfaced during the past few years, and have proven unable to bludgeon bitcoin into oblivion thus far.

Knifed by a Fork

The multiple offshoots of bitcoin could cause the world’s largest digital currency by market value to cede its crown.

Divides among developers as to how to proceed with upgrades to bitcoin’s network have led to “forks,” in which different versions of the currency are spun off from the original. Excessive fragmentation could prove a bug for bitcoin, just as it did for the U.S. financial system during the free banking era. When it comes to cryptocurrencies, hedge fund manager Mike Novogratz warned, “not everything can win” — though that’s not enough to stop him from launching a $500 million fund to invest in the asset class.

Ether, the second-largest digital currency, has posted massive gains since the bitcoin forks began. But even that advance pales in comparison to the surges in bitcoin and bitcoin cash over the same span.

Strangled by Regulators

Given bitcoin’s checkered history as the means to purchase illicit materials, a vehicle for capital flight, and a victim of theft, it’s no surprise that regulators around the world have cast a watchful eye over the asset class. As such, the specter of a complete crackdown on cryptocurrencies remains an ever-present tail risk. The SEC has been keeping an eye on crypto and has given guidance saying some tokens may be securities, making them subject to their oversight.

UBS Group AG Chief Investment Officer Mark Haefele said the wealth manager wouldn’t dedicate funds to bitcoin because “all it would take would be one terrorist incident in the U.S. funded by bitcoin for the U.S. regulator to much more seriously step in and take action.”

Federal Reserve Chair nominee Jerome Powell said bitcoin isn’t big enough to matter right now, but alluded to the possibility that it could impede the central bank’s transmission mechanism “in the long, long run.”