Bitcoin: A Smart Investment Move?

Bitcoin is a cryptocurrency with a market capitalization of over $1 trillion as of August 2024. It has experienced significant growth and volatility since its creation, with its price surging to over $70,000 in March 2024. However, it is important to note that Bitcoin is a highly speculative and risky investment due to its volatility, lack of regulatory oversight, irreversible transactions, minimal consumer protections, and potential for illicit use. While some investors view Bitcoin as a promising opportunity, others remain sceptical about its value and long-term viability. As with any investment, it is crucial to understand the risks involved before making a decision.

Bitcoin's volatility

Bitcoin's value is extremely volatile, with daily fluctuations of 5% being common, and occasional double-digit price moves. On May 19, 2021, its price plunged by nearly 30%, and it fell over 60% from November 2021 to May 2022. While Bitcoin has typically rallied after these drops, critics argue that these big fluctuations make it unsuitable as a reliable currency.

On the other hand, Bitcoin supporters argue that the volatility is understandable because Bitcoin is still in its early stages of adoption. As of 2021, only 114 million of the world's nearly 8 billion people had invested in Bitcoin, according to data from crypto.com. Advocates expect volatility to decrease as the market grows and matures, and believe that more people holding Bitcoin will lead to less power for big single holders, who can currently significantly influence price fluctuations.

The high volatility of Bitcoin is a significant risk factor for potential investors. While it has the potential for high returns, it also comes with the possibility of substantial losses. As such, investors are generally advised to approach Bitcoin as a speculative investment and to only invest an amount they are willing to lose.

Despite the volatility and associated risks, Bitcoin has experienced a significant price leap, and some people have created substantial fortunes by taking on the risk of investing in early-stage cryptocurrencies.

Bitcoin's use for payments

Bitcoin can be used to make payments, but it is not widely accepted by merchants. As of late 2022, roughly 2,352 US businesses accepted bitcoin, not including bitcoin ATMs. This number is increasing, and some big brands are now accepting bitcoin payments for everything from groceries to airline tickets.

There are several benefits to using bitcoin for payments:

• Low fees: Bitcoin transactions have lower fees than traditional payment methods, as they cut out the middleman.
• Fast international payments: There are no banks involved in bitcoin transactions, so there are no extra fees for making international transfers, and no waiting around for payments to clear.
• Security: Bitcoin transactions are secured by mathematics and energy. Cryptographic signatures prevent other people from spending your money, and the energy spent by proof of work (PoW) prevents people from undoing, rearranging or losing your transactions.
• Control: Bitcoin gives you control over your money, and strong protection against fraud.
• Anonymity: Bitcoin transactions do not require a credit card number, so malicious actors cannot steal your details. It is also sometimes possible to send a payment without revealing your identity. However, it should be noted that all Bitcoin transactions are stored publicly and permanently on the network, so your identity can be revealed during a purchase or in other circumstances.
• Accessibility: Anyone with an internet connection can make and receive bitcoin payments, meaning people who do not have access to traditional financial services can still participate.

There are also some drawbacks to using bitcoin for payments:

• Price volatility: The value of bitcoin fluctuates, so it is possible to lose money by holding bitcoin, or by the value dropping between the time you make a purchase and the time the transaction is approved.
• Irreversibility: A bitcoin transaction cannot be reversed—it can only be refunded by the person receiving the funds. This means you need to be careful to only do business with people and organisations you know and trust.
• Lack of regulation: Bitcoin is not an official currency, and it is not regulated, backed or guaranteed. This means there is no recourse if you get scammed, or if the exchange you store your keys with goes out of business.
• Transaction fees: Although there are fewer fees involved in bitcoin transactions than with traditional payment methods, you still need to pay transaction fees to the bitcoin network.

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. In fact, the energy used to mine Bitcoin is more than the energy used by Austria or Portugal.

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. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.

The largest country for Bitcoin mining is the United States, which accounts for 37.84% of Bitcoin mining activities. Researchers at the University of Cambridge report that most Bitcoin mining occurs in the U.S. (38%), China (21%), and Kazakhstan (12%). According to the Center for Strategic and International Studies, about 76% of the energy consumed in China is generated from coal and crude oil. The U.S. gets most of its electricity by burning fossil fuels, per 2019 data from the EIA. Kazakhstan mainly uses fossil fuels.

As a result, three countries heavily dependent on fossil fuels are responsible for around 72% of the world's Bitcoin mining.

Cryptocurrency mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. This is especially true for Application-Specific Integrated Circuit (ASIC) miners, which are specialized machines designed for mining the most popular cryptocurrencies. According-to Digiconomist, the Bitcoin network generates approximately 72,500 tons of electronic waste annually.

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.

The results of these practices are unknown, as not enough research has yet been completed to learn how much water is consumed (made unusable) or contaminated.

Bitcoin's association with criminal activity

Bitcoins Association with Criminal Activity

Bitcoin is often associated with criminal activity, but critics argue that this is mostly a myth. In 2019, US Treasury Secretary Steven Mnuchin stated that Bitcoin was a national security issue due to its use in illicit activities. However, the facts suggest otherwise. While it is true that criminals can use Bitcoin for money laundering, financial sanctions evasion, and corruption-related crimes such as bribery and embezzlement, the volume of such transactions is relatively small.

In 2022, illicit crypto volumes reached an all-time high of $20.6 billion, primarily due to sanctioned entities. However, the share of all crypto activity linked to illegal activity was only 0.24%$800 billion to $2 trillion laundered through traditional financial systems, which accounts for about 2% to 5% of the global GDP.

One of the main arguments against Bitcoin is its perceived role in facilitating criminal transactions. Criminals can exploit the inherent pseudonymity and decentralised nature of Bitcoin to conduct illicit activities without detection. However, Bitcoin and other cryptocurrencies do not provide complete anonymity due to Know-Your-Customer (KYC) policies implemented by most crypto exchanges. Even without KYC scanning, law enforcement agencies can easily track crypto transactions on the blockchain, which is transparent and immutable.

The transparency of blockchain technology and the active involvement of crypto exchanges, such as Binance, help law enforcement agencies combat criminal activity. In most cases, crypto exchanges are not used to harbour criminals but act as intermediaries for laundering stolen or otherwise ill-gotten profits. For example, in 2022, the Binance Investigations team responded to over 47,000 law enforcement requests, with an average response time of three days, which is significantly faster than any traditional financial institution.

While Bitcoin has been criticised for its association with criminal activity, it is important to note that the volume of such transactions is relatively small compared to traditional financial systems. The public ledger of blockchain technology allows anyone to view the entire codebase at any time, making it easier to track and prosecute illegal transactions. As digital forensics departments improve their ability to track blockchain transactions, criminals may find it increasingly difficult to use cryptocurrencies for illicit purposes.

In conclusion, while Bitcoin has been associated with criminal activity, the volume of such transactions is small compared to traditional financial systems. The transparent nature of blockchain technology and the cooperation of crypto exchanges with law enforcement agencies help mitigate the risks of illicit activity. However, as Bitcoin continues to gain popularity, it is important for investors to understand the risks and regulatory environment associated with cryptocurrencies before considering adding them to their portfolios.

Bitcoin's value

Bitcoin has experienced tremendous growth and has become the leading cryptocurrency by market capitalisation. In March 2024, it reached an all-time high of over $70,000. However, it has also witnessed extreme volatility, with daily fluctuations of 5% and occasional double-digit price moves. In 2022, its price fell by more than 75% from its peak.

The value of Bitcoin is also tied to its ability to meet the criteria of money or a currency. Bitcoin can be used as a medium of exchange, a store of value, and a unit of account. It has the advantage of being decentralised, existing outside the control of governments and central authorities. This makes it attractive to those seeking an alternative to traditional financial systems.

Additionally, Bitcoin has the advantage of divisibility, portability, and durability. It can be divided into eight decimal places, making it highly divisible. It can be easily transferred and used across borders, and it has a long lifespan due to its digital nature.

However, Bitcoin also faces several challenges and criticisms. Critics argue that Bitcoin is too volatile, inefficient, and energy-intensive. There are also concerns about its use in illegal activities and a lack of consumer protections.

Despite these criticisms, Bitcoin has a growing popularity, and its value is expected to increase over time. Its value is influenced by various factors, including supply and demand, investor sentiment, and market speculation.

In summary, Bitcoin's value is derived from its scarcity, functionality as a currency, and its ability to meet the criteria of money. Its value is highly volatile and subject to market forces, but it has the potential for significant growth due to its limited supply and increasing demand.

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