Bitcoin Investment: Is It Trustworthy?

Bitcoin is a cryptocurrency with a decentralised network, beyond the control of governments and regulators. It is a secure payment system, guaranteed by blockchain technology, with a fixed supply to prevent inflation. Bitcoin has been a wild success story, with a meteoric exchange rate. However, it is also extremely volatile, prone to roller-coaster fluctuations in price. This volatility is due to its status as a relatively new, unregulated financial ecosystem, which makes it vulnerable to shifting investor sentiment and scams. Bitcoin is also limited in supply, which means that its price is subject to the whims of supply and demand. As a result, it may be more suitable as an asset class than as a currency.

There are several risks associated with Bitcoin, including market risk, regulatory uncertainty, and cybersecurity concerns. It is important for investors to do their research and only invest what they can afford to lose, as Bitcoin is a highly speculative investment. Additionally, there are unique security concerns that must be addressed before investing Bitcoin in a trust.

Bitcoin's volatile nature

Firstly, Bitcoin is still in its infancy, having been made publicly available in 2009. Its rise in popularity began around 2010 when the price rose from fractions of a dollar to $0.09. Since then, its price has increased by tens of thousands of dollars, sometimes rising or falling by thousands within a day. This volatility is partly due to its young age, as investors, users, and governments are still working through the initial growing pains and concerns.

Secondly, Bitcoin has a fixed supply cap of 21 million coins, which introduces a scarcity factor. As the circulating supply gets closer to this limit, prices are likely to climb higher due to increasing demand and limited supply. This dynamic can lead to significant price fluctuations as demand ebbs and flows against the unyielding supply limit.

Thirdly, the actions of large-scale investors, often called "whales," can significantly impact Bitcoin's price volatility. These investors hold substantial amounts of Bitcoin, and their buying or selling decisions can lead to sharp price changes. If these whales were to suddenly sell a significant portion of their holdings, prices would plummet as other investors panic and follow suit.

Additionally, media coverage and regulatory news strongly influence Bitcoin's price. Positive media attention can increase investor interest and demand, while negative news or rumours of stringent regulations can lead to fear-induced sell-offs. For example, when media outlets announced Proshare's introduction of its Bitcoin Strategy ETF in late October 2021, Bitcoin's price skyrocketed. However, when investors realised the ETF was linked to Bitcoin through futures contracts, prices dropped back down.

Lastly, market sentiment plays a crucial role in Bitcoin's volatility. This sentiment is shaped by news coverage, investor commentary, and broader economic events, which can trigger rapid shifts in investor behaviour. For instance, announcements from influential figures or entities within the cryptocurrency space can lead to sudden surges or drops in Bitcoin's price as investors react to perceived opportunities or threats.

In summary, Bitcoin's volatile nature is a result of its nascent stage, fixed supply cap, the influence of large-scale investors, media and regulatory impact, and market sentiment. These factors contribute to the large price swings and unpredictable behaviour of Bitcoin's market.

Bitcoin as an asset class

Bitcoin has been described as a new asset class by Goldman Sachs. However, some sources argue that it cannot be both a currency and an asset class.

Bitcoin is the first scarce digital asset ever created, with a fixed total supply of 21 million coins. Its new supply is cut in half every four years through the "halving" mechanism, until all 21 million coins are mined. Approximately 19 million coins have been mined to date, with around 5 million believed to be lost, 10 million stored in long-term cold storage, and 3 million on exchanges.

Bitcoin's scarcity is critical to its potential as an asset class. Before Bitcoin, the only known scarce assets (valued only for their scarcity as a store of value) were precious metals. With the growing number of cryptocurrencies, this environment is rapidly changing.

Compared to other cryptos, Bitcoin benefits from having the highest network effects and the largest market cap, resulting in the highest investor confidence. Bitcoin is also seen as a store of value akin to digital gold, and a call option on the future of finance. Over the past year, there has been a surge in use cases for cryptos.

However, Bitcoin and other cryptocurrencies are extremely volatile and prone to roller-coaster fluctuations in price. They are also subject to scams and other types of fraud. Bitcoin's limited supply also means that it will be subject to the whims of supply and demand, making it unsuitable for the most basic function of a currency, which is to serve as a vehicle of exchange.

Overall, while Bitcoin has been described as a new asset class, there are still considerable risks and uncertainties surrounding it.

Bitcoin's regulatory environment

Bitcoins Regulatory Environment

The regulatory environment for Bitcoin is complex and ever-evolving, with different countries adopting their own regulatory frameworks. Some nations have implemented strict regulations to curb Bitcoin usage, while others have taken a more progressive and lenient approach. This patchwork of regulations has made it challenging for users and investors to confidently navigate the global Bitcoin market.

United States

In the US, the regulatory landscape for Bitcoin involves the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and state-level regulations. The SEC regulates securities, including certain cryptocurrencies and initial coin offerings (ICOs), while the CFTC oversees commodities, such as Bitcoin futures and derivatives. Each state also has its own regulatory framework, with varying levels of progressiveness in their legislation.

Europe

The European Union (EU) generally recognises Bitcoin as a crypto-asset and does not prohibit its use, although individual countries within the EU have their own regulations. The 5th Anti-Money Laundering Directive (AMLD5) is an EU-wide regulation that mandates the registration and monitoring of all cryptocurrency traders and holders to combat terrorism and money laundering.

Canada

In Canada, cryptocurrency exchanges must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), report suspicious transactions, comply with plans, and retain certain records. Canada was also the first country to approve a Bitcoin exchange-traded fund (ETF).

United Kingdom

The UK recognised crypto assets as regulated financial instruments in 2022. Crypto exchanges and custodian wallet providers must comply with the reporting obligations of the Office of Financial Sanctions Implementation (OFSI). Crypto derivatives trading is banned in the UK.

Japan

Japan has embraced Bitcoin and taken a progressive approach to its regulation. In 2017, Japan officially recognised Bitcoin as a legal form of payment. It has implemented a licensing system for cryptocurrency exchanges and a registration system for cryptocurrency traders.

China

China has taken a restrictive approach towards Bitcoin, banning its trading, mining, and initial coin offerings (ICOs). The Chinese government is concerned about money laundering and financial stability. However, China has shown interest in blockchain technology and is developing its own digital currency.

Australia

Australia classifies cryptocurrencies as legal property, subjecting them to capital gains tax. Exchanges are free to operate in the country, provided they register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and meet specific AML/CTF obligations.

India

India's stance on cryptocurrency regulation is uncertain, with a bill proposing to prohibit all private cryptocurrencies yet to be voted on. There is a 30% tax on crypto investments and a 1% tax deduction at the source for crypto trades.

Brazil

Bitcoin is not legal tender in Brazil, but a law legalising cryptocurrencies as payment methods was passed in 2022. The Brazilian Central Bank was designated the authority to regulate, authorise, and supervise crypto exchange operations.

El Salvador

El Salvador became the first country to recognise Bitcoin as legal tender in 2021, meaning businesses are required to accept Bitcoin for goods and services. There is no capital gains tax on Bitcoin spent in El Salvador.

Paraguay

Paraguay has implemented a regulatory framework for businesses operating in the cryptocurrency field, considering virtual assets as security tokens that the public is entitled to benefit from.

Panama

Panama introduced a bill in 2021 to enable cryptocurrencies to be used for civil and commercial transactions, although they are not considered legal tender.

The regulatory landscape for Bitcoin is constantly evolving, and it is important for users and investors to stay informed about the latest developments and regulations in their respective countries.

Bitcoin wallet security

Bitcoin wallets are vulnerable to fraudsters, scammers, and thieves. Here are some ways to keep your Bitcoin wallet secure:

• Use a hardware wallet: Hardware wallets, such as those offered by Trezor and Ledger, are USB-like devices that come with pre-installed security layers and encryption features. They are not connected to the internet, making it harder for cybercriminals to access.
• Keep your private key offline: Take your private key offline and store it in the real world. Write it down on a piece of paper and keep it in a dry place, protected from heat and direct sunlight.
• Use a secure internet connection: Avoid public networks as they are vulnerable and have security flaws. Use a trusted home or private network when accessing your wallet.
• Use up-to-date antivirus software: Install reliable antivirus software and keep it, along with your operating system, up to date to protect against malware and other malicious programs.
• Be cautious of unknown links: Be wary of suspicious links and websites that may be clones designed to steal your private key. Verify the website address before entering any sensitive information.
• Use strong, unique passwords: Avoid common words and personal information in your password. Use a combination of letters, numbers, and punctuation marks that is hard to guess but easy for you to remember.
• Never share your private key: Do not give your private key to anyone or allow third parties to make transactions for you.
• Use two-factor authentication: Enable two-factor authentication for an extra layer of security when accessing your wallet.
• Regularly back up your wallet: Back up your wallet to ensure you can access it if your device is lost, stolen, or fails. Store your backup in a different, safe location.
• Use multiple wallets: Create separate wallets for different purposes, such as a wallet for day-to-day transactions and another for larger amounts.
• Be careful with online services: Online exchanges and wallets have been vulnerable to security breaches in the past. Choose these services carefully and consider using other types of Bitcoin wallets.
• Use cold storage: Cold storage devices are not connected to the internet and are, therefore, less vulnerable to hacking attempts.
• Be cautious with your mobile device and PC: Never use public Wi-Fi, turn off auto-updates, always use a 2-Factor Authenticator when applicable, password-protect your device, and protect your devices with up-to-date antivirus tools.
• Double-check the destination address: Always verify the recipient's address when making transactions to ensure you are sending the funds to the correct address.
• Avoid storing large amounts on exchanges: Do not keep more than you need for trading on exchanges, as they are vulnerable to hacking attempts and scams.

Bitcoin's safety as a long-term store of value

Bitcoin has proven itself to be a spectacular way to grow wealth over time. With an annualized return of 230% over the last decade, it performed ten times better than the Nasdaq 100. However, Bitcoin has also suffered from high volatility. In 2014, it lost 58% of its value, and in 2018, it dropped by 73%. From its peak in November 2021 to its bottom in November 2022, Bitcoin lost over 75% of its value.

Bitcoin's volatility is due in part to its status as a relatively new and unregulated financial ecosystem. This means that it is prone to huge price swings as investors may not know exactly what to make of it yet. Additionally, Bitcoin is still subject to shifting regulations, which can also impact its value. For example, in 2021, China's crackdown on crypto-related activities coincided with a drop in Bitcoin's price.

Despite its volatility, Bitcoin has some security benefits that make it appealing as a long-term store of value. Firstly, it is decentralized, meaning it is beyond the control of governments and regulators. This was one of the key features that attracted Bitcoin's original fan base, who were enticed by the idea of a secure payment system that was guaranteed by blockchain technology.

Another security benefit of Bitcoin is its fixed supply. There will only ever be 21 million Bitcoin in existence, and after 2140, no more will be created. This makes Bitcoin the scarcest asset in the world and helps to retain its value. As demand increases, the price of Bitcoin will increase, making it an ideal store of value.

Additionally, Bitcoin's supply schedule is constant and predictable. Bitcoin's supply schedule is also disinflationary, meaning the amount that gets mined per block decreases by half every four years. This event is called "The Halving," and as a result, Bitcoin becomes scarcer over time, regardless of demand or price increases.

Another advantage of Bitcoin as a long-term store of value is its divisibility. Bitcoin is essentially infinitely divisible. Even as Bitcoin increases in value, it is still possible to transact with Bitcoin due to its infinite divisibility.

However, there are also some concerns about Bitcoin as a long-term store of value. One of the main concerns is its volatility, as mentioned earlier. Another concern is that Bitcoin is not "backed" by anything tangible, as it is a digital asset. Some argue that sound money must be backed by something real and independently valuable, and Bitcoin does not meet these criteria.

In conclusion, while Bitcoin has shown impressive returns over the last decade, it has also suffered from high volatility. It is important for investors to carefully consider the risks and potential downsides of investing in Bitcoin before making any decisions. However, Bitcoin also has some security benefits and unique features that make it a compelling long-term store of value for many people.

Frequently asked questions