Bitcoin: A Risky Investment Gamble Or A Wise Choice?

Bitcoin is a highly controversial investment option. Some people believe in its potential as a decentralized currency and store of value, while others warn of its volatility and lack of regulation. Bitcoin's price volatility and the lack of regulation in the market make it a risky investment option. However, its finite supply, low fees, and high liquidity make it an attractive investment for those seeking short-term profits.

Bitcoin is highly volatile

Bitcoin's value is unstable and unpredictable. It is common for cryptocurrencies to lose 30% of their value within a single weekend. In the past, cryptocurrencies have tripled in value, only to tumble back down. For example, in 2013, Bitcoin's value decreased by 80% and it took three years for it to recover. In 2018, there was a decline that lasted about a year, and there were drops of 50% or more in 2021 and 2022.

The price of Bitcoin is influenced by various factors, including market demand, government regulations, technological advancements, and investor sentiment. For example, in 2022, when Elon Musk tweeted negative views about cryptocurrencies, many of these currencies lost 30% to 40% of their valuation.

The volatility of Bitcoin can be a concern for investors, especially those who are risk-averse. However, it is important to note that the volatility of Bitcoin is expected to decrease over time as more institutions and governments enter the market with long-term interest.

Despite the volatility, some individuals believe in the potential of Bitcoin as a decentralized currency and store of value, leading them to consider it a good long-term investment.

It's prone to fraud and hacking

Bitcoin is prone to fraud and hacking, and there are many examples of this.

Fraud

Cryptocurrency fraud is a serious issue, and there are many ways fraudsters can trick people into buying cryptocurrency and sending it to them. Here are some common types of fraud:

• Investment scams: These are one of the top ways scammers trick people into buying cryptocurrency and sending it to them. Scammers often use social media or online dating apps or sites to find their targets. They might promise to grow your money or offer investment advice. They might even pretend to be a celebrity or a love interest. They will steer you to a fake investment website and ask you to transfer your money into their online account. If you log in to your “investment account,” you won’t be able to withdraw your money at all, or only if you pay high fees.
• Business, government, and job impersonators: In these scams, the scammer pretends to be someone you trust to convince you to send them money by buying and sending cryptocurrency. They might impersonate well-known companies, government agencies, or utility companies. They will text, call, email, or send messages on social media — or maybe put a pop-up alert on your computer. They might say there’s fraud on your account, or your money is at risk — and to fix it, you need to buy crypto and send it to them. But that’s a scam.
• Blackmail scams: Scammers might send emails or U.S. mail to your home saying they have embarrassing or compromising photos, videos, or personal information about you. Then, they threaten to make it public unless you send them cryptocurrency. Don’t do it. This is blackmail and a criminal extortion attempt. Report it to the FBI immediately.

Hacking

Hacking is also a common way for fraudsters to steal cryptocurrency. Hackers can gain access to a victim’s computer systems or private network, encrypt sensitive information or data, and demand a ransom from the victim to restore access to the encrypted information or data upon payment. They will then provide detailed instructions on how to pay the fee to get the decryption key and may accept payment in crypto assets.

There are also many examples of fraud and hacking in the news. For example, in 2022, more than 80,000 Bitcoin millionaires saw their accounts drop to zero during the crypto crash. In another example, hackers stole $400 million of crypto in the first three months of 2023. In a third example, FTX, one of the largest platforms for buying and selling crypto, went bankrupt in November 2022 after its founder, Sam Bankman-Fried, was arrested and charged with fraud for stealing money from his customers’ accounts.

It's not a stable currency

Bitcoin is not a stable currency. It is a risky investment with high volatility and should only be considered if you have a high-risk tolerance, are in a strong financial position, and can afford to lose some or all of your investment.

The most important feature of a currency is that it be a stable store of value. This is vital for a developing country's economy to attract the investment it needs. Even in developed countries, a stable currency value is key to investment because investors are expecting a stream of future earnings to earn back their investment plus some profit. Instability in currency values means that an investor cannot accurately predict the value of those future earnings. This uncertainty makes investments less valuable, and so less investment happens.

Over the past month, the value of a Bitcoin has experienced an average daily change of 2% in value, sometimes down but mostly up. For comparison, over the same month, the exchange rate between the euro and the U.S. dollar had an average daily change of less than 1% and only changed 3% over the entire month. While Bitcoin was rising 49% in the past 30 days, it had seven days where its value changed by over 3%, more than the value of the dollar changed in the entire month.

Another basic feature of a currency is to facilitate transactions. Yet, to protect the security of the blockchain that makes cryptocurrencies like Bitcoin so secure, processing Bitcoin transactions is very slow. In fact, because of a limit on the number of transactions that can be completed in a day, it sometimes takes days to complete a simple transaction. Its very security negates its value in everyday use.

Bitcoin is also prone to hoarding. The job of a currency is to stay in circulation. Currencies enable the transaction of other goods and services. They are just the medium of exchange and do not represent value. However, when it comes to Bitcoin, investors want to hoard large amounts as they believe it will increase in value over time.

Bitcoin is also highly unpredictable. Movements in the price of Bitcoin do not follow any fixed pattern. For instance, stocks seem to have a direct relation to GDP growth, whereas bonds have an inverse relationship with interest rate growth. However, when it comes to Bitcoin, the movements seem completely random. There is no significant correlation to any factor. Hence, Bitcoin investors cannot keep track of the fundamentals because they do not know what these fundamentals are.

Lastly, Bitcoin is not backed by tangible assets. Traditional currencies such as gold and silver had value because they were considered precious metals and emerged as currencies in almost all parts of the world. On the other hand, fiat currencies derive their value from the power of the government. It is illegal not to accept these currencies in the country where they are issued. However, there is no tangible asset or government decree that assures the value of Bitcoin.

It's not a predictable currency

Bitcoin is not a predictable currency. Its price movements do not follow any fixed pattern, and there is no significant correlation with any factor. This makes it difficult for investors to track the fundamentals of Bitcoin, as they are unclear what these fundamentals are.

The price of Bitcoin is influenced by traders and investors, and it is prone to dramatic increases and decreases. For example, in 2022, it fell more than 75% from its all-time high. This volatility is driven by emotion and desire, and it is further fuelled by hype and speculation.

The unpredictability of Bitcoin is also due to the lack of intrinsic value. Unlike traditional currencies, Bitcoin is not backed by tangible assets or government decree. It does not generate cash flow, and its value is based purely on speculation. Bitcoin's exponential growth rate and volatility further discourage consumers from spending it, as they hope it will continue to increase in value.

Additionally, Bitcoin transactions are slow and expensive, with confirmation times of around 10 minutes and median transaction fees of about $20. This, along with its unstable value, makes it an unviable medium of exchange.

In summary, Bitcoin's unpredictable nature stems from its speculative nature, lack of intrinsic value, volatility, and the challenges associated with its transactions. These factors make it difficult for investors to predict its price movements and incorporate it into their investment portfolios.

It's not widely accepted

Bitcoin is not widely accepted as a form of payment for goods and services. While some businesses have started to accept Bitcoin, it is far from being a widespread practice.

One of the main reasons why Bitcoin is not widely accepted is its volatility. The value of Bitcoin can fluctuate significantly in a short period, making it a risky investment. For example, in 2022, Bitcoin's value fell more than 75% from its all-time high. This volatility can make it challenging for businesses to accept Bitcoin as a form of payment, as the value of the goods or services they are selling could change rapidly.

Another reason for the lack of widespread acceptance is the slow transaction processing time for Bitcoin. Due to the limit on the number of transactions that can be completed in a day, it can sometimes take days to complete a simple transaction. This slow processing time is a significant drawback for businesses, especially those with high transaction volumes.

Additionally, Bitcoin is not backed by tangible assets or government decree, which further reduces its credibility as a widely accepted currency.

Furthermore, Bitcoin is prone to hoarding by investors, who believe that its value will increase over time. This behaviour goes against the primary function of a currency, which is to stay in circulation and facilitate the transaction of goods and services.

Lastly, the regulatory landscape for cryptocurrency is still evolving. Some countries have banned it, while others are looking for ways to regulate it. This uncertainty can deter businesses from accepting Bitcoin as a form of payment.

In conclusion, while Bitcoin has some of the key attributes of a currency, such as scarcity, divisibility, acceptability, portability, durability, and uniformity, it is not yet widely accepted. The volatility, slow transaction processing, lack of backing by tangible assets or governments, hoarding by investors, and regulatory uncertainty all contribute to this lack of widespread acceptance.

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