Should You Invest In Bitcoin?

Bitcoin has delivered unbelievable results so far, but it's still a risky investment. The cryptocurrency has soared to new highs in 2024, but it's important to proceed with caution. Bitcoin is a speculative asset, and its price remains highly volatile. It's also not a good diversifier, as it's becoming more correlated with stocks. Additionally, it poses a significant risk to the environment due to its energy-intensive mining process. However, Bitcoin has a lot of potential and is the world's most popular and most valuable cryptocurrency. It's also decentralized, which means it can't be controlled by a single government, central bank, or company. Ultimately, investing in Bitcoin is a personal decision, and it's important to have a diversified portfolio before investing in speculative assets.

Bitcoin's 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 the average price in a given period.

However, critics argue that Bitcoin is too volatile to be a reliable currency, with daily fluctuations of 5% 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.

Despite the volatility, some investors have been well compensated for the risk. Bitcoin has historically exhibited high volatility or high measures of standard deviation, but its returns have been disproportionately skewed to the positive side. This is evident in Bitcoin's Sharpe ratio of 0.96 from 2020 to early 2024, indicating that investors have been more than compensated for the risk compared to the S&P 500.

Additionally, Bitcoin's Sortino ratio of 1.86 is nearly double its Sharpe ratio, revealing that much of the volatility was on the upside. While Bitcoin has experienced significant price drawdowns and high standard deviations to the downside, there have been more instances of the price moving quickly up versus down over time.

Historically, low volatility has typically occurred at the end of long bear markets when selling energy is low, and Bitcoin's price begins to increase. This was evident in February 2024 when Bitcoin surpassed $60,000 with much lower realised volatility than previously seen.

While Bitcoin is considered a volatile asset, its volatility has been declining, and it has even been less volatile than some traditional asset classes. Additionally, investors have been compensated for the risk, as evident in its Sharpe and Sortino ratios. Bitcoin's volatility is also linked to its market cycle and can provide clues to future price movements.

Bitcoin's use for payments

Bitcoin is a decentralised and anonymous digital currency, based on blockchain technology. It is designed to be peer-to-peer, reducing the need for third-party involvement.

Bitcoin payments can be made via a cryptocurrency wallet, which can be installed on a computer or mobile device. The wallet application holds the keys needed to access the cryptocurrency. The wallet has an address that is used for transactions, similar to an email address. To make a payment, the user opens their wallet app, clicks 'send payment', enters the amount and the recipient's QR code or wallet address, and then clicks 'send'.

There are hundreds of wallet applications available, each with different features. Some are compatible with nearly all cryptocurrencies, while others may only work with a few. Some wallets can use a device's camera to scan QR codes to create unique addresses for sending and receiving crypto. Some even have near-field communication capabilities that allow touchless payments.

Cryptocurrency payment gateways are also available. These are third-party payment processors that enable merchants to accept digital payments and receive fiat currency in exchange. Payment gateways can remove the anonymity of who is being dealt with, while maintaining the customer's preference for it. They can also reduce the volatility risk of losing value while waiting for a transaction to be verified. However, using a payment gateway means having to pay small transaction fees.

Bitcoin transactions are secured by mathematics and energy. Cryptographic signatures and energy spent by proof of work (PoW) prevent people from spending your money or undoing, rearranging or losing your transactions. Bitcoin also allows users to protect their identity, as there is no card number that can be stolen.

Bitcoin is a very easy and low-cost way to transact. There is no need to sign up, swipe a card, type a PIN or sign anything. All that is needed to receive Bitcoin payments is to display the QR code in the Bitcoin wallet app and let the other party scan the mobile device or touch the two phones together (using NFC radio technology). The Bitcoin network is always running, even on weekends and holidays. There are no banks to make users wait three business days to send money internationally, no extra fees for making an international transfer, and no limitations on the minimum or maximum amount that can be sent.

Bitcoin's environmental impact

Energy Consumption and Greenhouse Gas Emissions

Bitcoin's energy consumption is substantial, with an annual usage of 129.45 terawatt-hours (TWh), according to the Cambridge Centre for Alternative Finance. This amount of energy is comparable to the energy consumption 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 high energy consumption leads to significant carbon emissions, with an estimated 68.02 metric tons of carbon dioxide equivalent (MTCO2E) in 2022, according to Climate Watch. The White House also noted that Bitcoin requires more energy than all other cryptocurrencies combined.

Water and Land Usage

In addition to its carbon footprint, Bitcoin mining has significant water and land footprints. 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, enough to meet the domestic water needs of more than 300 million people in rural sub-Saharan Africa. The land footprint of worldwide Bitcoin mining activities during this period was 1.4 times the area of Los Angeles.

E-waste

Bitcoin mining also generates a significant amount of electronic waste (e-waste). The production and disposal of hardware specifically for Bitcoin mining is a critical issue. The short lifespan of mining hardware contributes to the growing problem of global e-waste. Bitcoin's annual e-waste is estimated at 30.7 metric kilotons, comparable to the amount of IT and telecommunication equipment waste produced by the Netherlands.

Fossil Fuel Usage

Bitcoin mining is highly dependent on fossil fuels, particularly coal and natural gas, which accounted for 45% and 21% of Bitcoin's energy supply mix, respectively, during the 2020-2021 period. This heavy reliance on fossil fuels has worrying impacts on the environment, especially when compared to other renewable energy sources.

Mitigation Strategies

Despite the environmental concerns surrounding Bitcoin, there are efforts to mitigate its impact. Bitcoin miners are exploring ways to utilise stranded energy, such as natural gas, wind, and solar power, to fuel their operations. Additionally, some miners are addressing natural gas flaring, a common byproduct of oil drilling, by using this gas to produce electricity for mining operations. These strategies not only help reduce atmospheric methane emissions but also contribute to environmental conservation.

Bitcoin's association with criminal activity

Bitcoins Association with Criminal Activity

Bitcoin is often associated with criminal activity, but some argue that this is a misconception. In 2019, US Treasury Secretary Steven Mnuchin stated that Bitcoin was a national security issue because it had been used for illicit activities. Similarly, in 2021, Janet Yellen, President-elect Joe Biden's pick for Secretary of the Treasury, expressed concern about the use of cryptocurrencies in criminal activity and terrorist financing. Yellen stated that cryptocurrencies are "used, at least in a transaction sense, mainly for illicit financing".

However, the data suggests otherwise. In 2022, illicit crypto volumes reached an all-time high of $20.6 billion, primarily due to sanctioned entities. Yet, the share of all crypto activity linked with illegal activity was only 0.24%. This is a significantly smaller proportion than the $800 billion to $2 trillion laundered through traditional financial systems in fiat, which amounts to about 2% to 5% of the global GDP. According to an excerpt from Chainalysis' 2021 report, the criminal share of all cryptocurrency activity fell from 2.1% in 2019 to just 0.34% in 2020.

The blockchain's transparency and the active involvement of crypto exchanges help law enforcement agencies combat criminal activity. Blockchain's inherent transparency means that all transactions are logged on a publicly accessible ledger, allowing anyone to view the entire codebase at any time. This leaves a clear trail of evidence that prosecutors can use to secure convictions. Additionally, crypto exchanges such as Binance have been very active in assisting authorities in their fight against criminal activity. 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 critics argue that the anonymity provided by Bitcoin facilitates criminal activity, supporters point out that Bitcoin does not provide complete anonymity due to the Know-Your-Customer (KYC) policies implemented by most crypto exchanges. Even without KYC scanning, law enforcement agencies can easily track crypto transactions to identify criminal activity.

In conclusion, while there is some association between Bitcoin and criminal activity, it is important to recognise that the majority of cryptocurrency is not used for illegal purposes. Crypto exchanges and the inherent transparency of blockchain technology play a crucial role in assisting law enforcement agencies to combat criminal activity.

Bitcoin's value

Bitcoin is a cryptocurrency with no physical form, relying on blockchain technology to exist as a digital commodity or collectable. It is a decentralised currency, meaning that it is not controlled by a single government, central bank, or company.

Finally, Bitcoin's value is influenced by its regulatory status. Cryptocurrency is currently largely unregulated, but there are efforts to change this. Increased regulation could provide consumer protections and increase Bitcoin's legitimacy, but it could also limit its decentralised nature.

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