Bitcoin Investment: Is It Really Worth It?

Bitcoin is a decentralised, digital currency that was created in 2009. It is the most popular and valuable cryptocurrency, with a market cap of over $360 billion. Bitcoin's value is derived from its status as the first cryptocurrency and an alternative to fiat currency. It is secured by cryptography, with transactions verified by a process known as mining.

Bitcoin has been one of the best investments since its creation, with its price skyrocketing to as high as $68,789 in November 2021. However, it has also experienced extreme volatility, with investors experiencing significant losses in 2022.

Investing in Bitcoin comes with high risks due to its volatile nature, the potential impact of government regulations, fraud, and hacks. On the other hand, it offers high potential rewards, with some experts predicting its price could reach millions of dollars in the future.

Before investing in Bitcoin, it is crucial to understand the technology, market dynamics, and your risk tolerance. It is also essential to do your research and consult with a financial advisor to make an informed decision.

Bitcoin's value as an inflation hedge

However, Bitcoin's performance during inflationary periods has been mixed. In 2022, Bitcoin failed to counter rampant global inflation and its price performance was weak. This has weakened the argument that Bitcoin can effectively hedge against inflation during economic turmoil.

Proponents of Bitcoin argue that it is still a better hedge against inflation than stocks or real estate. Bitcoin does not require maintenance and is not affected by the risks involved in stock-picking. It is also less correlated with other asset classes, making it a potentially attractive tool for portfolio diversification.

Critics, on the other hand, point to the extreme volatility of Bitcoin as a reason for its unreliable performance as an inflation hedge. The price of Bitcoin is largely based on consumer sentiment, making it difficult to view it as a long-term store of value. Additionally, Bitcoin is still a relatively new asset class, and there is not enough historical data to fully understand its behaviour during inflationary periods.

While Bitcoin may not have proven itself as a reliable inflation hedge yet, some believe that it could gain acceptance over time and become less volatile. As the cryptocurrency market matures, Bitcoin may evolve into a more stable asset that can better protect investors against inflation.

Bitcoin's legality in the USA

As of March 2024, Bitcoin was legal in the U.S. and other developed countries, including Japan and the U.K. However, the legal status of Bitcoin varies across the world, with some countries imposing restrictions or bans.

In the U.S., the Internal Revenue Service (IRS) considers Bitcoin and other cryptocurrencies as property, issuing appropriate tax treatment guidelines for taxpayers. The U.S. Treasury, on the other hand, classifies Bitcoin as a decentralised virtual currency.

Bitcoin is treated differently for tax purposes, often considered property rather than currency. For example, in the U.S., the IRS treats Bitcoin as property, and taxpayers are required to declare any virtual currency transactions.

While Bitcoin is legal in the U.S., it operates in a deregulated marketplace, and there are concerns about its use in illegal activities. Additionally, the extreme volatility of Bitcoin and other cryptocurrencies has led to discussions about increased regulation to protect investors.

The legality of Bitcoin is a complex and evolving issue, and it's important to stay informed about the latest regulations and guidelines in your specific country or jurisdiction.

How to store Bitcoin

Storing Bitcoin safely is essential to avoid losing your investment. Here are some detailed instructions on how to store Bitcoin securely:

Types of Wallets

There are several types of Bitcoin wallets available, each with its own advantages and disadvantages. The main categories are:

• Custodial wallets: These are managed by a third party, such as an exchange like Coinbase. They store your private keys for you and can provide insurance for your holdings. However, they have been the target of many attacks, and you are relying on their security measures.
• Non-custodial wallets: With these wallets, you have full ownership and control of your private keys. This option offers more security but can be less convenient and user-friendly.
• Hot wallets: These wallets are connected to the internet, making it easy to access and transact with your Bitcoin. However, they are more vulnerable to hacking. Examples include desktop, mobile, and web-based wallets.
• Cold wallets: Cold wallets are offline and considered the safest option for storing Bitcoin. They can be in the form of hardware wallets or paper wallets. While they provide stronger security, they are less convenient to access.

Recommendations and Best Practices

• For small amounts of Bitcoin that you plan to use frequently for transactions, a hot wallet is a convenient option.
• For larger amounts of Bitcoin, it is recommended to use a cold wallet, such as a hardware wallet or paper wallet, to provide stronger security.
• If you use a hot wallet, make sure to enable two-factor authentication (2FA) for an extra layer of protection.
• Regularly back up your Bitcoin wallet to prevent loss due to computer failure or other issues.
• Physically record and securely store the recovery phrases for your crypto wallets. Do not store them digitally or share them with anyone.
• When choosing a crypto exchange or wallet service, conduct thorough research to ensure they have high security standards and a good reputation.
• For hardware wallets, it is recommended to purchase directly from the manufacturer and avoid used item marketplaces.
• If you use a paper wallet, take precautions to protect the paper from damage, theft, or loss.

Bitcoin's environmental impact

Energy Consumption

Bitcoin's energy consumption is substantial, with an annual consumption of 129.45 Terawatt-hours (TWh), according to the Cambridge Centre for Alternative Finance. This is comparable to the energy usage of entire countries. During the 2020-2021 period, the global Bitcoin mining network consumed 173.42 TWh of electricity, which would rank 27th in the world if Bitcoin were a country. This energy consumption is highly dependent on fossil fuels, with coal accounting for 45% of Bitcoin's energy supply, followed by natural gas at 21%.

Carbon Emissions

The carbon footprint of Bitcoin mining is significant. The greenhouse gas emissions from Bitcoin mining alone could potentially push global warming beyond the Paris Agreement's goal of holding anthropogenic climate warming below 2 degrees Celsius. During the 2020-2021 period, Bitcoin mining emitted over 85.89 million metric tons of CO2 (MtCO2). To offset these emissions, 3.9 billion trees would need to be planted, covering an area almost equal to the Netherlands, Switzerland, or Denmark, or 7% of the Amazon rainforest.

Water Usage

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

Land Usage

The land footprint of Bitcoin mining is also notable. During the 2020-2021 period, the land footprint of worldwide Bitcoin mining activities was 1.4 times the area of Los Angeles, or approximately 1,870 square kilometers.

E-Waste

Bitcoin mining also contributes to the growing problem of electronic waste (e-waste). The production and disposal of hardware specifically for Bitcoin mining is a critical issue. Bitcoin miners cycle through a significant amount of short-lived hardware, which can lead to an increase in global e-waste. It is estimated that Bitcoin's annual amount of e-waste could surpass 64.4 metric kilotons, while global e-waste is expected to grow by 70% from 2016 to 2050.

Potential Solutions

While Bitcoin mining has a significant environmental impact, there are potential solutions and improvements that can be made. Bitcoin miners are exploring ways to utilise stranded energy, such as natural gas from remote mining operations or stranded sources of wind and solar power. By harnessing these energy sources, Bitcoin miners can improve the financial viability of renewable energy projects and play a beneficial role in environmental conservation. Additionally, the most notable change in the Web3 space has been the Ethereum blockchain network's shift from a proof-of-work system to a more energy-efficient proof-of-stake mechanism, reducing energy requirements by more than 99%.

Bitcoin's future as a global currency

Bitcoin is a global, decentralised currency that is beyond the control or guarantee of any country. Its value is derived from its decentralised nature, allowing relatively quick and anonymous transactions without the need for a bank.

However, Bitcoin's extreme volatility has limited its appeal as a store of value. It is also difficult for financial analysts to determine its true value because it does not generate cash flow or revenue and does not represent ownership of any physical assets or intellectual property.

Some countries have banned cryptocurrencies, while others have sought to restrict their adoption. The regulatory landscape is complex and varies from country to country. Despite these challenges, Bitcoin has the potential to become the 21st-century gold, a global currency that is not controlled by any government.

In the long term, Bitcoin's biggest impact may be in denominating business and trade. It is unlikely to be used for day-to-day payments, like buying coffee, but it could be used for robust economic activity, such as storing value, settling large payments, and conducting financial services.

Frequently asked questions