Bitcoin Investment: Is It A Smart Move?

Bitcoin is a cryptocurrency, a virtual currency, that was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. It is a decentralised digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin's value has risen dramatically over the years, but it is a very volatile asset. It is also a highly speculative investment, as it has no intrinsic value and is not backed by anything. Bitcoin can be used to make purchases, but there are some vendors that accept the original crypto.

Bitcoin's value and volatility

Bitcoins Value and Volatility

Bitcoin is a very volatile asset. Its value is influenced by many factors, including supply and demand, investor sentiment, media hype, and government regulations.

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 closer the circulating supply gets to this limit, the higher the prices are likely to climb.

Investor Sentiment

Wealthier investors tend to hold their Bitcoins, preventing those with fewer assets from gaining exposure. This can drive volatility as these "Bitcoin whales" can influence the market value. If they were to suddenly sell their holdings, prices would plummet as other investors panic.

Media Hype

Media outlets, influencers, and industry moguls can create investor concerns, leading to price fluctuations. For example, when media outlets announced Proshare's introduction of its Bitcoin Strategy ETF in October 2021, Bitcoin's price skyrocketed.

Government Regulations

Government agency views of cryptocurrency can significantly impact Bitcoin's price. For instance, China's ban on cryptocurrency transactions in 2021 caused a massive shutdown of crypto mining farms in the country, and Bitcoin's price dropped to around $29,700.

Other Factors

Other factors contributing to Bitcoin's volatility include its speculative nature, the influence of news and current events, and its decentralised nature.

Bitcoin's value is also derived from its decentralised network. There is no central authority to intervene in the market, which can lead to dramatic price swings.

As Bitcoin is still a relatively new asset, it is still in the price discovery phase, and its value is yet to stabilise.

Risks of Investing in Bitcoin

Bitcoin is a risky investment due to its volatility and the many risks associated with it, including regulatory, security, insurance, fraud, and market risks.

Volatility

Bitcoin's price can fluctuate dramatically, and it is not uncommon for it to have a $2,500 difference between its high and low price in a single day.

Regulatory Risk

The continuous battle between cryptocurrency projects and regulators creates uncertainty around longevity and liquidity.

Security Risk

Cryptocurrency exchanges are digital and vulnerable to hackers, malware, and operational glitches.

Insurance Risk

Bitcoin is not insured by government agencies like the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). While some exchanges provide insurance, it is usually limited to system failures or cybersecurity breaches.

Fraud Risk

Despite the security measures within blockchains, there are still opportunities for fraudulent activity.

Market Risk

As with any investment, Bitcoin values can fluctuate, and it is highly sensitive to newsworthy events.

No Guarantee of Value

Bitcoin has no guaranteed value and is not backed by any asset or government. Its value is derived from its scarcity and the belief that it will retain its value.

Bitcoin's future as a universal currency

Bitcoin is a cryptocurrency, a virtual currency that can be used as money and a form of payment outside the control of any one person, group, or entity. It was introduced in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. Bitcoin is decentralised, meaning it is not controlled by a central authority such as a government or central bank. This makes it attractive to anyone who wants to take back power from governments and financial institutions.

Bitcoin has the potential to become a universal currency. Its value is not tied to any one country, which means it could prevent any single country from controlling the money supply. It is also secure, using advanced cryptographic algorithms to prevent fraud. All transactions are recorded on a public ledger called the blockchain, which ensures transparency and accountability.

However, there are several challenges to Bitcoin becoming a universal currency. One is regulatory uncertainty. Bitcoin is not currently considered a security by authorities, but that stance could change in the future. Another challenge is scalability. The Bitcoin network already consumes as much energy as entire countries like Argentina and Norway, and it is prone to creating large amounts of electronic waste. Finally, there is the issue of volatility. Bitcoin's value has fluctuated wildly since its creation, making it an unstable medium of exchange.

Despite these challenges, Bitcoin's rise as a potential universal currency could have significant implications for the future of money and the global economy. It challenges the dominance of traditional global reserve currencies like the US dollar and offers the potential for a more equitable and decentralised financial system. Whether Bitcoin will become a universal currency remains to be seen, but its impact on the world of finance will be felt for years to come.

Risks of investing in Bitcoin

Bitcoin is the most successful virtual currency today, but with any new frontier, there are obstacles. Here are some of the risks associated with investing in Bitcoin.

Volatile and Fluctuating Market

The price of Bitcoin is constantly changing, and with such an unpredictable market, there is no guarantee of a return on investment. For example, on November 6, 2018, one bitcoin was worth $6,461.01. Just under a year later, on December 17, 2017, the price topped $20,000, but days later, buyers could not sell their investment for more than $14,626. To avoid massive losses, investors are advised to keep a vigilant eye on the market and make small investments.

Cyberattacks and Fraud

Bitcoin is a technology-based currency, which leaves it open to cyberattacks and hacking. Many reports suggest that buyers lose their investments on exchanges and mining losses. Additionally, there is a fair amount of fraud in the bitcoin market, with fake exchanges duping unsuspecting investors out of their bitcoins.

Little or No Regulation

The bitcoin market is currently operating with little to no major regulations. The government doesn’t have a clear stance on cryptocurrency, and it is not taxed. A lack of taxation could lead to problems should bitcoin pose competition for government currency. There is also no physical collateral to back up Bitcoin's value, unlike other forms of currency or investment.

Block Withholding

New bitcoins are created by solving mathematical equations called "blocks." A mining pool can use computational power to mine a block and hide it from honest miners, essentially allowing a select few to reap the benefits while others are left with nothing.

Currency or Investment Opportunity?

With a constantly shifting market, no regulation, and zero physical collateral, investors can end up losing everything they invest in Bitcoin. While it could potentially pay off, it is generally recommended to approach this investment with caution and make small investments.

How to invest in Bitcoin

Bitcoin is one of the most widely used types of cryptocurrency. Virtual "coins" or "tokens" are used in a cryptocurrency system instead of physical cash. These coins have no intrinsic value and aren't backed up by gold or silver. Bitcoin was created to prevent crypto coins from being fraudulently duplicated.

Bitcoin uses a digital technology called "blockchain", an advanced coding mechanism that disperses a single code over thousands of different computers. Blockchain also employs a "public ledger", which uses thousands of computers (referred to as "nodes") to keep track of coins and their owners.

Once you purchase coins, you can use them in online transactions wherever they’re accepted. Remember, when you make a transaction with a coin, there’s no actual money being pulled from your bank account. Money only leaves your bank account when you purchase the coin itself—not when you make purchases with a coin.

You don’t need very much to invest in Bitcoin! You'll need personal identification documents, bank account information, and a secure internet connection.

• Join a Bitcoin Exchange: Determine where you want to make a Bitcoin purchase. Most Bitcoin investors use cryptocurrency exchanges like Coinbase, Binance, Kraken, Gemini, or Bitfinex.
• Get a Bitcoin Wallet: When you purchase a coin, it’s stored in a “wallet,” which can be a "hot wallet" or a "cold wallet." A hot wallet is operated by either your cryptocurrency exchange or by a provider, while a cold wallet is an actual piece of hardware that stores your coins.
• Connect Your Wallet to a Bank Account: Link your wallet to your bank account to enable you to purchase and sell coins.
• Place Your Bitcoin Order: Decide how much Bitcoin you should purchase. Some coins cost thousands of dollars, but exchanges often allow you to buy fractions of a single coin—your initial investment could be as low as $25.
• Manage Your Bitcoin Investments: After you’ve purchased bitcoin, you can use your coins to make online transactions, hold your coins for a long period in the hopes it’ll appreciate in value, or perform day trading with your coins.

No investment is inherently “good” or “bad.” It depends entirely on your risk tolerance, your investment strategy, and your financial goals. Bitcoin is a very high-risk investment because it’s a volatile asset. That means that Bitcoin values may rise or fall dramatically in value over a very short period.

Tips for Investing in Bitcoin:

• Understand your risk tolerance: Bitcoin is a high-risk investment, so carefully review your risk tolerance before investing.
• Diversify Your Portfolio: Protect yourself from investment losses by diversifying your investment portfolio. Your primary investments should be low-risk, followed by medium-risk, and then high-risk investments.
• Start Small: If you’re unsure, start with a small investment.

Bitcoin's environmental impact

Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy—more than is used by some small countries—to perform the work associated with crypto mining. The energy intensity of crypto mining is a feature, not a bug. Bitcoin mining is the automated process of validating Bitcoin transactions without the intervention of trusted third parties like banks. The way the transaction validation process is designed uses large amounts of energy—the network depends on the computational power of thousands of computers.

Bitcoin mining is also responsible for a lot of electronic waste. Over 77 kilotons of electronic waste are annually produced as a byproduct of Bitcoin mining.

The energy used to mine Bitcoin also contributes to global carbon emissions. The Bitcoin network is responsible for about 73 million tons of carbon dioxide per year—equal to the amounts generated by Oman.

The environmental impact of Bitcoin mining is further exacerbated by the fact that most Bitcoin mining occurs in countries that are heavily dependent on fossil fuels for their energy. Researchers at the University of Cambridge report that most Bitcoin mining occurs in the U.S. (38%), China (21%), and Kazakhstan (12%). As a result, three countries heavily dependent on fossil fuels are responsible for around 72% of the world's Bitcoin mining.

Due to the heat generated by mining machines, miners, manufacturers, and maintainers have turned to water cooling to reduce the costs of keeping equipment cool. In some cases, large mining farms have discharged hot or warm water into lakes or other water bodies, raising concerns about raising the average temperature of or contaminating these bodies of water.

In short, because the validation process is energy-intensive, competitive, and rewards-based, it is unlikely that Bitcoin will reduce its energy footprint. Even after the last bitcoin is rewarded, the network will still require large amounts of electricity to validate transactions unless it switches to another verification protocol.

Frequently asked questions