I find it useful to think about risk in cryptocurrencies across three dimensions: market, technology and regulation. Like dimensions in space and time, they don’t exist independently; they intersect.
- The market risk dimension is the adoption risk facing any new technology. It’s represented less by cryptocurrency critics than it is by people who just don’t care.
- The technology risk dimension is the risk that the underlying technology will break. This may be the most-often overlooked. How many can say they understand why Bitcoin’s SHA-256 hash function is unbreakable?
- The regulatory risk dimension receives the most attention, but its nuances are often poorly understood. Those nuances – and the market’s slow progress toward grasping them – were on display in this week’s string of news cycles.
This week was about regulatory and technology risk. It’s been amusing to watch commentators swing from wringing their hands about centralization of Bitcoin mining in China to wringing their hands about a Chinese government crackdown on Bitcoin mining.