Bitcoin Investment: Can You Make Money?

Bitcoin has been one of the best investments in the world since its creation in 2009. However, it is a highly volatile asset, and its value has fluctuated significantly over the years. For example, in 2017, its price raced towards $20,000, but it wasn't until December 2020 that investors recovered their losses.

Bitcoin is a decentralised form of digital cash that eliminates the need for intermediaries like banks and governments. It uses blockchain technology to support peer-to-peer transactions.

There are pros and cons to investing in Bitcoin. On the one hand, it offers cost-efficient transactions, privacy, and decentralisation. On the other hand, it is subject to hacking concerns and is not protected by the Securities Investor Protection Corporation (SIPC).

Whether or not Bitcoin is a good investment depends on your individual circumstances and your risk tolerance.

Bitcoin's volatility

Bitcoin is considered volatile asset, and its price fluctuates relative to the average price over a given period. The volatility of Bitcoin is driven by speculation, as investors bet on its price going up or down. This causes sudden increases or decreases in its price, leading to volatility.

Volatility is a measure of how much the price of a financial asset varies over time. It indicates the level of risk associated with holding an asset. The more volatile an asset, the higher the risk, and the more likely people will want to limit their exposure to it.

However, Bitcoin's volatility has been declining, and it is expected to continue doing so as the asset class matures. In 2024, Bitcoin's volatility was nearly half of what it was in 2021 when its price reached similar levels.

The high volatility of Bitcoin can be frustrating for investors, but it stems from the combination of its massive potential and entirely uncertain outlook. While Bitcoin has the potential for high returns, it is essential to remember that it is a risky investment.

Managing Risk

Due to its volatility, investing in Bitcoin carries a high level of risk. To manage this risk, investors should consider the following strategies:

• Diversification: It is important to maintain a diversified portfolio that includes several different types of investments to reduce overall risk exposure.
• Risk Tolerance: Bitcoin is generally recommended for investors with a high-risk tolerance who are in a strong financial position and can afford to lose some or all of their investment.
• Allocation: As a rule of thumb, investors are advised not to invest more than 10% of their portfolio in risky assets like Bitcoin.
• Safe Storage: Keeping Bitcoin in a secure wallet, such as a cold wallet or hardware wallet, can help protect against theft or loss of credentials.
• Regulatory Considerations: The regulatory environment for Bitcoin is constantly evolving, and increased regulation could impact its appeal to investors.
• Environmental Impact: Bitcoin mining has a significant environmental impact, producing about 40 billion tons of carbon dioxide annually, which may be a concern for investors with ESG principles.

In conclusion, while Bitcoin has the potential for high returns, its volatility makes it a risky investment. Investors considering Bitcoin should carefully assess their risk tolerance, conduct thorough research, and implement risk management strategies to mitigate potential losses.

Liquidity and inflation risk

The liquidity of Bitcoin is influenced by various factors, including the number of trusted exchanges, trading volume, acceptance by retailers, and the availability of crypto ATMs and payment cards. The daily trading volume of Bitcoin provides insight into its liquidity. In the first quarter of 2024, Bitcoin's daily trading volume ranged from $9 billion to $100 billion, while the forex market's average daily turnover was about $7.5 trillion in 2022. This highlights the lower liquidity of Bitcoin compared to other markets.

The impact of inflation on Bitcoin is complex. Bitcoin is currently inflationary, with its supply increasing as more coins are mined. However, Bitcoin has a fixed supply of 21 million, and the rate of new Bitcoin creation is halved every four years. This deflationary mechanism could make Bitcoin an attractive hedge against inflation in the long term.

During periods of high inflation, central banks may raise interest rates or tighten monetary policies, which can lead to a decline in asset prices, including cryptocurrencies. In recent times, Bitcoin's returns have been correlated with stock market indexes. When the U.S. Federal Reserve indicated raising interest rates in May 2022, Bitcoin's price plummeted alongside stocks. This correlation contradicts the notion of Bitcoin as an inflation hedge.

However, the narrative around Bitcoin and inflation is evolving. The expected renewal of money printing by central banks could further debase fiat currencies, highlighting the store-of-value properties of Bitcoin, which has a fixed supply. Additionally, concerns about the stability of the traditional banking system may drive more people to view Bitcoin as an insurance asset outside the realm of centralized finance.

In summary, while Bitcoin faces liquidity challenges and its relationship with inflation is complex, it has the potential to become a more attractive investment during periods of high inflation and economic uncertainty.

Privacy and security

While Bitcoin disguises your personal information, the address of your crypto wallet is publicly available. This means that hackers could use web trackers and cookies to find more information about the transactions that could lead to your private information and data. If anonymity is part of your definition of security, Bitcoin might not be entirely secure.

Similarly, your cryptocurrency is only as secure as the crypto wallet you keep it in. If you lose your wallet password or someone else gets ahold of it, you lose your Bitcoin.

Hot wallets are apps on devices such as computers, phones, or tablets. These wallets generate the private keys to your coins on internet-connected devices. Hot wallets are best for small amounts of cryptocurrency or cryptocurrency that is actively trading on an exchange and may be used like a checking account.

Cold wallets are not connected to the internet and are at less risk of being compromised. Offline wallets or hardware wallets store a user's private key on something that isn't connected to the internet and come with software that allows investors to view their portfolio without putting their private key at risk. Cold wallets are the most secure way to store your bitcoin or other cryptocurrencies. They do, however, require technical knowledge to set up.

There are also hardware wallets, which are typically USB-drive devices that store a user's private keys securely offline. These wallets have advantages over hot wallets because they are unaffected by viruses that could infect one's computer. With hardware wallets, private keys never come into contact with a network-connected computer or potentially vulnerable software. The downside of hardware wallets is that they can be pretty expensive, and you’ll need a recovery seed to regain access to your crypto if you lose or misplace your wallet.

It's also worth noting that the more popular Bitcoin becomes, the more regulators may crack down on investors. More regulation could make Bitcoin less appealing to some investors but more appealing to others.

Storing your Bitcoins

• Hardware Wallets: These are special-purpose security-hardened devices designed to store Bitcoins. They are typically resistant to physical and digital attacks and are considered one of the best ways to store Bitcoins. Examples include the Ledger Nano X and Trezor Model T.
• Multi-Signature Wallets: These wallets require multiple private keys to move Bitcoins, providing an extra layer of security. They can be used to require agreement from multiple people to spend the Bitcoins and can also serve as a form of backup.
• Cold Storage Wallets: These wallets generate and store private wallet keys offline on a clean, newly installed, air-gapped computer. They are similar to hardware wallets but use a general-purpose computing device instead of a special-purpose peripheral.
• Hot Wallets: These are single-signature wallets that keep private keys on an online computer or mobile phone. They are the most vulnerable to malware or hackers but are suitable for small amounts and day-to-day spending.
• Custodial Wallets: In this case, an exchange, broker, or third party holds your Bitcoins in trust. However, it is important to note that if you don't hold the private keys, you don't truly own the Bitcoins.

It is recommended to use a combination of these storage methods, such as keeping a majority of your crypto wealth in cold storage and a smaller spending balance in a hot wallet. Additionally, always back up your Bitcoin wallet and regularly verify that your backup is still functional and secure.

Bitcoin's future

Arguments for investing in Bitcoin:

• Bitcoin has a relatively loose correlation with other asset classes, making it a potentially attractive tool for portfolio diversification.
• Its fixed supply may eventually make it an attractive hedge against inflation and a store of value.
• If Bitcoin becomes the world's universal digital currency, its demand and price will grow exponentially.
• Bitcoin's decentralized nature helps secure the network and make it resistant to manipulation, tampering, and fraud.
• It can serve as a way for people in underbanked regions or countries with unstable financial systems to protect their wealth and access critical financial services.
• Bitcoin has had exponential growth and is still the world's most popular and valuable cryptocurrency, with a market cap of more than $360 billion as of September 2022.
• It has a long-term track record of success, with its price skyrocketing from $1 in April 2011 to as high as $68,789 in November 2021.
• Bitcoin is already more efficient than credit cards for payments, and third-party solutions are making it even faster.
• Bitcoin is increasingly run on renewable energy sources, and its benefits may justify its energy usage.
• Most cryptocurrency usage is for legal transactions, and its public record can make illegal activity easier to spot.
• Its decentralized nature means it can't be controlled by a single government, central bank, or company, protecting it from inflation and dictators.

Arguments against investing in Bitcoin:

• Bitcoin is highly volatile, with daily fluctuations of 5% and occasional double-digit price moves.
• It is too inefficient to work as a means of payment, taking 10 minutes on average to process a single transaction.
• It relies on massive computing power, with more energy required to run it than to power the entire country of Poland.
• Criminal transactions are made with all kinds of currencies, and critics argue that Bitcoin makes them easier.
• One of the biggest criticisms of Bitcoin is that it's not backed by any meaningful value, and skeptics argue that scarcity alone is not enough to justify its value.
• Bitcoin doesn't have a central development team, which may make it harder to add new functions and innovate when necessary.
• It is not protected by the Securities Investor Protection Corporation (SIPC), and individual customers are not protected by insurance if their password is stolen.
• There is a threat of hacking, and while Bitcoin's blockchain has never been hacked, individuals can be hacked if they give out sensitive information.
• Bitcoin exchanges lack basic consumer protections found in traditional financial products.
• It is difficult to determine a true value for Bitcoin because it does not generate cash flow or revenue and does not represent ownership of physical assets or intellectual property.

In conclusion, whether or not to invest in Bitcoin depends on your individual circumstances and risk tolerance. It is a highly volatile asset, but it also has massive potential and a long-term track record of success. More regulation could make Bitcoin less appealing to some investors but more appealing to others.

Frequently asked questions