Here is my view of the risks common to Bitcoin and Ethereum, most significant risks first:
- Poorly crafted government regulation for cryptocurrencies would shut down legitimate and practical applications, leaving behind a cesspool of illicit activities in crypto-land. While regulation is necessary and good regulation would even be a boon to the adoption of Bitcoin and Ethereum, most policymakers have a poor and twisted understanding of cryptocurrencies. New York State’s BitLicense is an example of ambitious and maybe even well-intentioned regulation that ended up pushing promising and legitimate Bitcoin businesses out of New York. I’m hopeful that governments will listen to sensible policy makers who understand both the social and technical implications of Bitcoin (e.g. Ed Felten’s answer to What does the White House think of cryptocurrencies such as bitcoin?), but this is far from guaranteed.
- With both Bitcoin and Ethereum, standard vanilla transactions take at least three minutes to be considered confirmed. Imagine trying to pay for a coffee with Bitcoin and having to wait an hour for your payment to be confirmed. This is a major barrier to widespread adoption, and there are solutions proposed like the Bitcoin Lightning Network and the Ethereum Raiden Network. But the adoption of these protocols seems far off, and I view the lack of instant transactions as an existential risk for broad adoption of cryptocurrencies.
- Both Bitcoin and Ethereum are still susceptible to hostile takeovers by governments. I just wrote an answer about this: Pranav Gokhale’s answer to How vulnerable is the Bitcoin distributed ledger to a hostile takeover?.
In addition to these shared risks, the two currencies have some idiosyncratic risks.
- Bitcoin’s lack of centralization has been an enormous pain point in resolving questions about scalability. Unlike Ethereum, Bitcoin does not have a strong central non-profit foundation that is capable of making decisions to move the currency forward. This is often seen as an advantage, but it comes at the considerable cost that Bitcoin may just continue to bump into technical stalemates and be eclipsed by other cryptocurrencies.
- Relatedly, Bitcoin needs to make up its mind about whether it is built to serve billions of daily transactions, or whether it is a primarily a store of value and an investment like gold. The two are not compatible, at least right now.
And for Ethereum:
- At a high level, I am skeptical of the value of smart contracts and I think they are overhyped. I share Ed Felten and Karen Levy’s view that smart contracts are neither smart nor contracts. Moreover, most of the popular smart contracts I’ve seen so far are merely used for gaming and gambling. I would be happy to be wrong about my smart contract pessimism though, and I’m already far less pessimistic about smart contracts than I was a year ago.
- Ethereum is much more complicated than Bitcoin and as a consequence, it is much harder to reason about Ethereum’s security. One stunning consequence of this was the DAO Attack in 2016, in which 50 Million USD worth of Ether were stolen. The theft was reversed by a “hard-fork” but it remains a testament to the fact that Ethereum’s security principles have not been fully worked out.