Why You Should Avoid Bitcoin Investments

Bitcoin has been described as a gold rush, a craze, and even a disease. But is investing in the cryptocurrency ever a good idea?

Bitcoin is a decentralised, global cryptocurrency. It is issued and managed without any central authority, meaning there is no government, company, or bank in charge. This makes it more resistant to wild inflation and corrupt banks, but it also means that there is no central governing body to guarantee your bitcoin. If you lose it, it can be difficult to get back. If it gets stolen, then you are out of luck.

Bitcoin is highly speculative and extremely volatile. Its value is determined solely on the basis of demand and supply. It is impossible to accurately value, and it is not a useful investment vehicle. It does not create products, services or cash flow, and it is not widely accepted as legal tender for all debts, public and private.

So, while it may be tempting to jump on the bitcoin bandwagon, it is a risky move. If you can afford to lose every penny you invest, then go ahead. But if you have a mortgage, kids to put through college, credit card debt, or a lacklustre retirement account, don't even think about buying bitcoin.

Bitcoin is not an investment

Firstly, Bitcoin is not a tangible asset. It is not a company or a precious metal. It is a currency, and a volatile one at that. It is traded via a forex-style transaction, meaning it is decentralised and can be converted into other currencies. This is an extremely risky form of "investing" and is more akin to gambling. Bitcoin is not backed by any major power, and its limited supply and inability to be used in everyday commerce mean it has no discernable value. Its price is dependent on what someone else is willing to accept it for, and it is therefore a poor measuring stick of real-world value.

Secondly, Bitcoin is not secure. Cryptocurrency exchanges and wallets are regularly hacked, and because there is no central governing body, it can be difficult to retrieve your money if it is lost or stolen.

Thirdly, Bitcoin does not produce functional wealth. It does not kick off additional little Bitcoin pieces for you without cashing in your chips. It is a static form of wealth, meaning it does not create or throw off additional wealth on its own.

Finally, Bitcoin is not a practical application. It is not a convenient medium of exchange, and it has not emerged as a trusted way to evade financial institutions.

In summary, Bitcoin is not an investment. It is a speculative, volatile currency that is subject to rapid price movements and is not backed by any major power. It is not a secure way to store your wealth and does not produce functional wealth. Therefore, if you are looking for a stable, long-term investment, Bitcoin is not the answer.

It's extremely volatile

Bitcoin is well-known for its volatility, with its price capable of fluctuating by thousands of dollars within a single day. This volatility is driven by a range of factors, including supply and demand, investor sentiment, government regulations, and media hype.

Supply and Demand

The price of Bitcoin, like most commodities, is heavily influenced by supply and demand. With a limited supply of 21 million coins, the cryptocurrency's market value is affected by the number of coins in circulation and how much people are willing to pay. As supply decreases and demand increases, the price of Bitcoin is pushed further up.

Investor Sentiment

Investor actions and sentiments also play a significant role in Bitcoin's volatility. Large investors, known as "Bitcoin whales," can influence the market value by liquidating their holdings. Additionally, fear and greed are primary drivers of volatility, as investors fear missing out on big price movements, leading to panic buying or selling.

Government Regulations

Government agency views and regulations can also impact Bitcoin's price. For example, China's ban on cryptocurrency transactions in 2021 caused a significant drop in Bitcoin's price as miners were forced to relocate.

Media Hype

Media outlets, influencers, and industry experts can create investor concerns or hype, leading to price fluctuations. Positive or negative media attention can influence Bitcoin's price, as seen when Proshare introduced its Bitcoin Strategy ETF in 2021, causing a sharp rise in Bitcoin's value.

While Bitcoin's volatility can present opportunities for investors, it also carries significant risks. The unpredictable nature of its price movements makes it a highly speculative investment, and investors should carefully consider their risk tolerance before deciding to invest in Bitcoin.

It's not a stable source of income

Bitcoin is not a stable source of income. Here are some reasons why:

Volatility

Bitcoin's value is highly volatile, with frequent and significant price fluctuations. For example, in 2021, Bitcoin's price rose from just under $5,000 in March to over $63,000 in April, only to plunge by almost 50% over the next two months. In another instance, the price of one Bitcoin surged to over $60,000, an eightfold increase in 12 months, and then fell to half that value in just a few weeks.

Speculative Value

Bitcoin's value is largely driven by speculation and market sentiment, rather than intrinsic value. People buy Bitcoin, driving its price up, not because it does anything useful or produces money, but because they believe they can sell it to someone else for more money in the future. This is a risky and unstable strategy, as it relies on finding someone willing to pay a higher price, and any negative news or loss of confidence can cause a rapid decline in value.

Regulatory Factors

Bitcoin and cryptocurrencies are subject to regulatory factors that can significantly impact their value. For example, in 2021, China's government and central bank announced that all cryptocurrency transactions were illegal, causing Bitcoin's price to drop to around $29,700 as miners were forced to relocate. The prospect of increased regulation or even bans on cryptocurrencies in various countries creates an unstable environment for investors.

Limited Acceptance

Bitcoin has limited acceptance as a medium of exchange. While it has gained some popularity, only a small fraction of businesses accept it as a form of payment. Additionally, it is not widely accepted as legal tender, and its value fluctuates, making it challenging to set prices.

Security and Storage Concerns

Storing and protecting Bitcoin is a complex and challenging task. It must be stored in a digital wallet, either on a hardware-based platform or on the web, and both options have security risks. There have been numerous instances of Bitcoin exchanges and wallets being hacked, resulting in significant losses.

In conclusion, Bitcoin's volatile nature, speculative value, regulatory uncertainties, limited acceptance, and security and storage concerns make it a risky and unstable source of income.

It's not a tangible asset

Bitcoin is not a tangible asset because it does not have any physical substance. Unlike other financial instruments, it does not derive value from any asset. It is not backed by any tangible assets, like gold or silver, which have intrinsic value. Bitcoin's value is based purely on speculation and the belief that it will increase in price.

Bitcoin is a digital asset, and its value is highly volatile and subject to constant fluctuations. Its price is influenced by various factors, including tweets, regulatory factors, and the actions of a small group of investors.

Additionally, bitcoin is not widely accepted as a medium of exchange. While some companies, like Tesla, have added it to their balance sheets, it is not a preferred form of payment for most businesses and individuals. The majority of tokens are held by investors rather than being used for transactions, further limiting its utility as a medium of exchange.

The lack of physical substance and its status as a non-monetary asset are critical factors in considering bitcoin as an intangible asset. While it can be separated from the holder and sold or transferred, it does not give the holder a right to receive a fixed or determinable number of units of currency.

Furthermore, bitcoin is not considered cash or a financial asset by accounting standards bodies. It is classified as an intangible asset, similar to goodwill or patents, which are exclusive rights to technology rather than the technology itself.

In summary, bitcoin's value is based on speculation and herd behaviour rather than any tangible asset backing. Its volatile nature, limited real-world utility, and classification as an intangible asset by accounting standards bodies make it a risky and uncertain investment choice.

It's not a secure investment

Bitcoin is not a secure investment. Here are some reasons why:

Volatility

Bitcoin is extremely volatile and susceptible to wild price fluctuations. In 2022, the price of Bitcoin dropped from almost $48,000 to lows of around $16,000. This kind of instability can make it an unsafe investment choice.

Regulatory Factors

Most countries are not ready to accept Bitcoin due to the idea of a decentralised currency. The lack of consistent regulation and the uncertainty around the crypto regulatory environment add to the risk.

Security and Anonymity Concerns

Bitcoin's public ledger system, while providing some security, also means that your wallet address is publicly available. This can lead to potential privacy and security issues, as hackers could use web trackers and cookies to access your private information and data.

Scams and Fraud

The rise in popularity of Bitcoin and other cryptocurrencies has also led to an increase in scams and fraudulent activities. Criminals use fake apps, crypto wallets, and emails to lure people into giving up their private keys, resulting in the loss of crypto assets.

Limited Utility

Despite the hype, Bitcoin is not a widely accepted form of payment. In the US, for example, only approximately 2,300 businesses accept Bitcoin out of more than 30 million businesses.

Tax Implications

Investing in Bitcoin can also lead to a more complicated tax situation. Since cryptocurrencies are considered property by tax authorities, all transactions must be accounted for via capital gains and losses, which can be burdensome and time-consuming.

In conclusion, while Bitcoin may offer some benefits, it is essential to recognise the risks associated with it. It is a highly speculative and volatile investment, and investors should carefully consider these risks before deciding to invest.

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