Strategic Bitcoin Investments: Growing Your Money

Bitcoin is a cryptocurrency, a decentralised form of digital cash that removes the need for traditional intermediaries like banks and governments. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. Bitcoin can be used as a currency or an investment.

Bitcoin's value has risen dramatically since its launch, and its popularity has surged. However, it is a very high-risk investment due to its volatility. Its value may rise or fall dramatically over a short period, even within hours or days.

There are several ways to invest in Bitcoin, both directly and indirectly. One can purchase standalone Bitcoin, invest in companies that utilise Bitcoin technology, or participate in Bitcoin mining, among other methods.

Before investing in Bitcoin, it is important to understand your risk tolerance, diversify your investment portfolio, and start with small investments.

Bitcoin's volatility

Bitcoins Volatility

Bitcoin is considered a volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The volatility of Bitcoin is measured by how much its price fluctuates relative to its average price over a given period. Bitcoin's volatility is influenced by speculation and bets from crypto investors, who drive the cryptocurrency's price up or down to make a profit.

Despite its volatility, Bitcoin has been less volatile than some prominent individual securities. For example, over the last two years, Bitcoin's realised volatility has been lower than that of Netflix (NFLX) stock.

Historically, low volatility in Bitcoin has been a precursor to a price increase. There have been instances where Bitcoin's realised volatility hit new all-time lows, followed by steep rises in its price.

However, it is important to note that past performance is not a guarantee of future results. Bitcoin's price movements can be unpredictable, and it is prone to significant fluctuations, making it a risky investment.

To manage the risk associated with Bitcoin's volatility, investors can utilise various tools and strategies, such as hedging, and by including Bitcoin as only a small portion of a diversified portfolio. Additionally, investors can use cold wallets, which are encrypted portable devices similar to thumb drives, to store their Bitcoins offline and enhance security.

Bitcoin's efficiency for payments

Bitcoins Efficiency for Payments

Bitcoin was introduced in 2009 as a peer-to-peer electronic cash system, allowing online payments to be sent directly from one party to another without going through a financial institution. It is a decentralised form of digital cash that eliminates the need for traditional intermediaries like banks and governments. Bitcoin can be used as a currency or an investment.

How Bitcoin Payments Work

Bitcoin transactions are authenticated through its proof-of-work consensus mechanism, which rewards cryptocurrency miners for validating transactions. Bitcoin miners are the owners of high-speed computers that independently confirm each transaction and add a completed "block" of transactions to the ever-growing "chain". Miners are then paid in Bitcoin for their efforts, incentivising the decentralised network to independently verify each transaction.

Benefits of Bitcoin Payments

• Cost-efficient transactions and fast speeds: Once you own Bitcoin, you can make transfers anytime, anywhere, reducing the time and potential expense of any transaction.
• Privacy: Transactions don’t contain personal information, such as a name or credit card number. While it’s still possible to link a certain person to a certain wallet, transactions are generally more private than credit card transactions.
• Decentralisation: After the financial crisis and the Great Recession, some investors are eager to embrace an alternative, decentralised currency—one that is essentially outside the control of regular banks, governing authorities or other third parties.
• Growth potential: Some investors who buy and hold Bitcoin are betting that once it matures, greater trust and more widespread use will follow, and therefore Bitcoin’s value will grow.

Drawbacks of Bitcoin Payments

• Price volatility: While Bitcoin's value has risen dramatically over the years, buyers' fortunes have varied widely depending on the timing of their investment.
• Hacking concerns: While backers say the blockchain technology behind Bitcoin is even more secure than traditional electronic money transfers, there have been a number of high-profile hacks.
• Not protected by SIPC: The Securities Investor Protection Corporation insures investors up to $500,000 if a brokerage fails or funds are stolen, but that insurance doesn’t cover cryptocurrency.
• Transaction fees: Bitcoin trading can become expensive, with transaction fees averaging about $5 and occasional spikes of up to $100 or more.
• Energy consumption: The Bitcoin network is an energy sponge, using more energy in a year than some small countries.

Bitcoin Wallets

If you decide to buy Bitcoin, you’ll need a place to store it. Bitcoins can be stored in two kinds of digital wallets:

• Hot wallet: You can often store cryptocurrency on exchanges where it is sold. Other providers offer standalone online storage. Such solutions provide access through a computer browser, desktop or smartphone app.
• Cold wallet: An encrypted portable device much like a thumb drive that allows you to download and carry your Bitcoins.

Bitcoin's environmental impact

Carbon Footprint

Bitcoin mining has a significant carbon footprint due to its high energy consumption. During the 2020-2021 period, the global Bitcoin mining network consumed 173.42 Terawatt-hours of electricity. This energy consumption is comparable to that of entire countries, and if Bitcoin were a country, it would rank 27th in the world in terms of energy use. The resulting carbon emissions are substantial, and according to the United Nations University study, 3.9 billion trees would need to be planted to offset this footprint.

Water Footprint

Bitcoin mining also has a significant water footprint. During the 2020-2021 period, Bitcoin's water footprint was equivalent to the amount of water required to fill over 660,000 Olympic-sized swimming pools. This water consumption could meet the domestic water needs of more than 300 million people in rural sub-Saharan Africa.

Land Footprint

The land footprint of Bitcoin mining is also considerable. During the 2020-2021 period, the global Bitcoin mining network's land footprint was 1.4 times the area of Los Angeles, or approximately 1,870 square kilometers.

Energy Sources

Bitcoin mining heavily relies on fossil fuels, with coal accounting for 45% of its energy mix, followed by natural gas at 21%. Hydropower, a renewable source with significant environmental impacts, satisfies 16% of its electricity demand, while nuclear energy contributes 9%. Solar and wind energy provide only 2% and 5%, respectively.

E-waste

Bitcoin mining also generates electronic waste (e-waste) due to the short lifespan of the specialized hardware used in mining. This e-waste can contain toxic chemicals and heavy metals, leading to soil and water pollution if not properly recycled.

Country-Level Impacts

The environmental impact of Bitcoin mining varies by country, depending on their energy sources. China, the world's largest Bitcoin miner in 2020-2021, relies heavily on coal, a highly polluting energy source. Other countries in the top 10 Bitcoin mining nations, such as the United States, Kazakhstan, Russia, and Germany, also contribute significantly to Bitcoin's environmental footprint.

Regulatory Interventions and Technological Advancements

To mitigate the environmental impacts of Bitcoin and other cryptocurrencies, the UN scientists recommend regulatory interventions and technological advancements. They suggest investing in digital currencies that are more energy-efficient and less harmful to the environment. Additionally, they highlight the need to address the transboundary and transgenerational impacts of cryptocurrency mining, as the benefits often go to specific groups while future generations will suffer the environmental consequences.

Bitcoin's association with criminal activity

Bitcoins Association with Criminal Activity

Bitcoin has been associated with criminal activity due to its decentralised nature and the anonymity it offers users. However, it is important to note that this association is often overstated and that the majority of Bitcoin transactions are legitimate. Nevertheless, there are several reasons why criminals may be attracted to using Bitcoin and other cryptocurrencies for illegal purposes.

Firstly, Bitcoin offers a degree of anonymity to its users. While all transactions are recorded on a public blockchain ledger, the identities of those making transactions are not always known. This allows criminals to trade drugs, weapons, explosives, and other illegal goods and services without revealing their identity.

Secondly, cryptocurrencies are not tied to any central authority, which means that transactions can occur without the need for a third-party mediator. This lack of central control also means that there are no governmental sanctions or restrictions on transactions.

Thirdly, cryptocurrencies are easily accessible and can be transferred quickly and easily all over the world. All that is needed is an internet connection and a crypto wallet application. There are also no delays or reversals on transactions once they are confirmed, making it an attractive option for criminals looking to move money discreetly and swiftly.

Finally, the digital nature of cryptocurrencies means that they can be easily stored without taking up physical space, and they do not attract the attention of thieves or authorities.

Despite these attractions for criminals, it is important to note that the blockchain technology behind Bitcoin is transparent and immutable, making it possible for law enforcement agencies to track and identify criminal activity. Crypto exchanges also actively collaborate with law enforcement to combat criminal activity, and the Know-Your-Customer (KYC) policies they implement further reduce the anonymity of users. In fact, the use of cryptocurrencies for illicit activities is much smaller than that of traditional fiat currencies, and it has been declining in recent years.

Bitcoin's value and scarcity

Bitcoin is a scarce digital object—it is the first of its kind. It is scarce like silver and gold, and can be sent over the internet, radio, or satellite.

Bitcoin's scarcity can be quantified by its stock-to-flow (SF) ratio. The SF ratio is calculated by dividing the existing stockpile size by the yearly production. Bitcoin currently has an SF ratio of 25, placing it in the monetary goods category like silver and gold.

The SF ratio is important because it helps to determine the price of Bitcoin. As the SF ratio increases, so does the market value of Bitcoin. This is because a higher SF ratio indicates that the supply of Bitcoin is limited, which makes it more desirable to investors.

Bitcoin's price is also influenced by other factors such as regulation, hacks, and news. However, the dominant driving factor seems to be scarcity.

Bitcoin's scarcity, combined with its utility as a decentralized, open-source, and divisible currency, contributes to its value and investment growth potential.

Frequently asked questions