Bitcoin: Invest Or Avoid?

Bitcoin is a highly controversial topic, with some believing it to be the future of finance and others believing it to be a scam. It is a decentralised, peer-to-peer payment system with no central bank or government control. Bitcoin has soared to new highs in 2024, but it is still a speculative and volatile asset. So, is it worth investing in?

Bitcoin's volatility

Bitcoins Volatility

Bitcoin is a highly 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 over a given period.

However, Bitcoin is still far more volatile than the overall stock market. For example, in 2022, while the S&P 500 plunged by around 19%, Bitcoin lost over 60% of its value.

Bitcoin's high volatility means that it is a risky investment. Volatility indicates that an asset's value may substantially increase or decrease on any given day. The more volatile an asset, the more people will want to limit their exposure to it.

While Bitcoin has been highly volatile, it has also shown signs of maturation. For example, in 2024, Bitcoin reached a full year of weekly volatility below 75% for the first time ever.

Should You Invest in Bitcoin?

Given Bitcoin's volatility, it is a risky investment. It is important to remember that Bitcoin is a speculative asset, and there is a possibility that it could go to zero. Therefore, if you choose to invest, ensure that you have a high-risk tolerance, are in a strong financial position, and can afford to lose some or all of your investment. It is generally recommended that you invest no more than 10% of your portfolio in risky assets like Bitcoin.

Bitcoin's use for payments

Bitcoin is a peer-to-peer payment network that allows users to make transactions without the need for a central authority or banks. It is a decentralised form of currency, meaning that no individual or group owns or controls it.

One of the key advantages of Bitcoin is the ease and speed of transactions. Mobile payments are simple, requiring just a two-step scan-and-pay process. There is no need to sign up, swipe a card, enter a PIN, or sign anything. To receive Bitcoin payments, users simply need to display the QR code in their Bitcoin wallet app and allow the other party to scan their phone or touch the two devices together using NFC radio technology.

Bitcoin transactions are also highly secure. They are protected by cryptographic signatures and the energy spent by proof of work (PoW) processes, which prevent people from spending your money or undoing, rearranging, or losing your transactions. Bitcoin also offers a high level of protection against fraud, provided users take the necessary steps to protect their wallets.

Another benefit of Bitcoin is the ability to make fast international payments. Unlike traditional banks, Bitcoin allows users to send money across borders with no extra fees or waiting periods. There are also no limitations on the minimum or maximum amount that can be sent.

Users can also choose their own transaction fees. There is no fee to receive Bitcoins, and many wallets allow users to control the fee amount when spending. While most wallets have reasonable default fees, higher fees can be paid to encourage faster confirmation of transactions.

Finally, Bitcoin can help protect users' identities. Unlike credit card payments, Bitcoin transactions do not require users to provide a credit card number, reducing the risk of malicious actors stealing their information. In some cases, it is even possible to send payments without revealing the sender's identity, similar to using physical money.

Bitcoin's environmental impact

Energy Consumption and Carbon Emissions

Bitcoin mining is an energy-intensive process, requiring a massive amount of computing power to solve complex algorithms and secure transactions. This has led to concerns about the energy sources used and the resulting carbon emissions. According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), Bitcoin's energy needs are comparable to powering all the lights and TVs in the US. From 2020 to 2021, Bitcoin's global electricity consumption was 173.42 TWh, exceeding that of some countries. During this period, 67% of the electricity consumed was produced from fossil fuels, with coal being the primary source at 45%. As a result, Bitcoin mining emitted over 85.89 Mt of CO2 during the same period, contributing to global warming.

Water and Land Footprint

In addition to its carbon footprint, Bitcoin mining also 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.

Addressing Environmental Concerns

Some Bitcoin miners are exploring ways to reduce their environmental impact. One approach is to establish mining operations in areas with stranded energy sources, such as remote natural gas mining or renewable energy projects. By utilising energy that would otherwise be wasted, miners can reduce their environmental impact and improve the financial viability of renewable energy projects. Additionally, some experts suggest investing in other types of digital currencies that are more energy-efficient and less harmful to the environment.

While Bitcoin has been criticised for its environmental impact, it is important to note that its journey towards sustainability is ongoing. With relentless innovation and efficiency enhancements, Bitcoin has the potential to play a positive role in the green revolution and the fight against climate change.

Bitcoin's association with criminal activity

Bitcoins Association with Criminal Activity

Bitcoin and other cryptocurrencies have often been associated with criminal activity, but this is largely a misconception and a myth. While it is true that criminals can use the decentralised nature of cryptocurrencies to conduct money laundering and other financial crimes, the extent of this is often exaggerated.

In 2019, United States Treasury Secretary Steven Mnuchin stated that Bitcoin was a national security issue due to its use in illicit activities, and that cryptocurrencies were dominated by illegal activities and speculation. However, the data tells a different story. In 2019, criminal activity represented 2.1% of all cryptocurrency transaction volume (worth around $21.4 billion). This fell to just 0.34% ($10 billion) in 2020.

By comparison, it is estimated that between 2% and 5% of global GDP ($1.6 to $4 trillion) is connected with money laundering and illicit activity through traditional, fiat currencies. This means that criminal activity through cryptocurrency is much smaller than through traditional means, and is decreasing year on year.

One of the reasons that Bitcoin and other cryptocurrencies are attractive to criminals is the perception that they offer anonymity. However, this is not entirely true. Blockchain technology, which underpins cryptocurrencies, is inherently transparent. All transactions are logged on a publicly accessible ledger, allowing anyone to view the entire codebase at any time. This means that utilising cryptocurrencies for illicit activities leaves a clear trail of evidence that law enforcement can use to secure convictions.

In addition, most crypto exchanges have Know-Your-Customer (KYC) policies in place, further reducing the anonymity of users. Even without KYC scanning, law enforcement agencies can still easily track crypto transactions and identify criminal activity.

Crypto exchanges are also actively involved in combating criminal activity. For example, Binance, the world's largest exchange by trading volume, has assisted in many critical operations that have brought down criminal groups operating with millions of dollars. In 2022, the Binance Investigations team responded to over 47,000 law enforcement requests, with an average response time of three days – significantly faster than any traditional financial institution.

Binance has also launched a Global Law Enforcement Training Program, which includes training, workshops and other activities led by a team of skilled professionals, including security experts and former law enforcement officers.

While it is true that cryptocurrencies can be used for criminal activity, their association with such activity is often exaggerated. The transparent nature of blockchain technology, the active involvement of crypto exchanges, and the ease with which law enforcement agencies can track transactions all help to combat criminal activity.

Bitcoin's value

Bitcoins Value

Bitcoin is a risky investment with high volatility, and it is generally recommended only if you have a high-risk tolerance, are in a strong financial position, and can afford to lose some or all of your investment.

Pros

Bitcoin has historically offered the potential for high returns. It is decentralized, and some argue that it is increasingly run on renewable energy sources. Bitcoin is also a non-correlated asset, similar to gold, meaning it may not follow the trends of other assets like stocks.

Cons

Bitcoin is highly volatile, inefficient for payments, and susceptible to fraud and hacks. It is not widely accepted as a form of payment, and it is unclear whether it will become a global currency. Bitcoin is also not a hedge against inflation and is subject to capital gains taxes.

Key Considerations

Before investing in Bitcoin, it is important to understand the risks and consider the following:

• Volatility: Bitcoin experiences significant price fluctuations, and there is a risk of substantial losses.
• Payments: Bitcoin is inefficient for daily transactions and impractical for small purchases.
• Environmental Concerns: Bitcoin requires massive computing power and energy usage, which has drawn criticism.
• Criminal Activity: Critics argue that Bitcoin enables illegal activity, money laundering, and dark web purchases.
• Value: There are concerns about whether Bitcoin's value is backed by any meaningful assets or if it is inflated by hype.
• Competition: Alternative cryptocurrencies (altcoins) may offer newer features and could potentially overthrow Bitcoin as the largest cryptocurrency.
• Regulatory Environment: The future regulatory environment for crypto is uncertain, and government regulations could impact the market.

Investing in Bitcoin involves a high level of risk, and it is essential to carefully consider these factors before making any investment decisions. It is recommended to proceed with caution and only invest an amount you are willing to lose.

Frequently asked questions