Bitcoin: A Good Investment Or Risky Business?

Bitcoin has become a household name, with its value soaring and promising high returns, but it's also highly volatile and lacks regulation. So, is it a good investment?

Bitcoin's price volatility and the lack of market regulation make it a risky investment option. However, some individuals believe in its potential as a decentralised currency and store of value, considering it a good long-term investment.

Before jumping on the bandwagon, it's important to understand the potential benefits and risks. Bitcoin is a highly liquid investment with low fees, and its limited supply makes it less susceptible to hyperinflation. It also presents new opportunities, as it's a young industry with new coins regularly emerging, and its price volatility can lead to significant profits.

On the other hand, the threat of hacking and Bitcoin's extreme price volatility are significant drawbacks. Its value can fluctuate drastically, and it's not uncommon for lesser-known exchanges to be hacked.

Ultimately, the decision to invest in Bitcoin depends on your risk appetite and perspective on its future.

Bitcoin's volatility and risk

Bitcoins Volatility and Risk

Bitcoin is a financial tool that carries risks, just like any other payment method or currency. However, the risks are slightly different from traditional currencies and payments. One of the main risks is its volatile price. Bitcoin's price volatility and the lack of regulation in the market make it a risky investment option.

Volatility

Bitcoin's price is highly volatile, as seen by its drastic fluctuations in value. For example, investors who bought Bitcoin in December 2017 at $20,000 saw its value decrease to $7,051 weeks later. Holding onto Bitcoin for long periods may not be suitable for all investors.

Bitcoin's limited supply and lack of a centralized authority make it subject to significant price swings. It's also still a relatively young currency in its price discovery phase. As speculations over its value shift, Bitcoin's trade value can change suddenly and dramatically.

Uncertainty vs Volatility

Uncertainty is the degree of likelihood that an investment may change in value. Volatility is the degree to which the investment may change in value. According to research from Dew-Becker and colleagues at Yale and Northwestern, investors protect their investments against volatility, not uncertainty.

Risk

Bitcoin is a relatively new development and isn't yet widely adopted. This adds a layer of risk because it could be replaced by other more efficient digital currencies, or it could be regulated out of existence.

One of the main problems that cause Bitcoin's volatility is that there's simply too much of it held in the hands of too few people. Large crypto whales can create massive swings in prices by selling off big quantities.

When it comes to speculating on the bitcoin price, there are quite a few risks attached. Speculating on price volatility is never a good idea, and bitcoin is proving to be rather volatile on a daily basis.

Regulation

The lack of regulation in the market also makes Bitcoin a risky investment. Changes to the law can cause wild swings in asset value, but that can create as much value as it destroys.

Other Risks

• Threat of hacking: While Bitcoin's blockchain has never been hacked, individuals can still get hacked if they give out sensitive information, such as their private keys.
• Lack of SEC scrutiny: Bitcoin does not undergo the same Securities and Exchange Commission (SEC) scrutiny that regulated securities markets, like the stock exchange, do.

Bitcoin's history and performance

Bitcoin is a cryptocurrency, a digital asset that uses cryptography to control its creation and management rather than relying on central authorities. It was created in 2008 by pseudonymous developer Satoshi Nakamoto, who mined the genesis block of bitcoin (block number 0), which had a reward of 50 bitcoins. The first bitcoin transaction took place on 12 January 2009, when programmer Hal Finney downloaded the bitcoin software the day it was released and received 10 bitcoins from Nakamoto.

In its early days, bitcoin was primarily regarded as a medium of exchange, but it is now considered a store of value. From the mid-2010s, some businesses began accepting bitcoin in addition to traditional currencies. Bitcoin has undergone rapid growth to become a significant store of value both on- and offline, and its current adoption rate outpaces that of the internet in 1998. As of 2024, it is the world's most traded cryptocurrency and the original digital coin.

Bitcoin's price is highly volatile. Its value increased from $1,242 on 29 November 2013 to $19,783.06 in January 2017. In December 2017, it reached a then all-time high of $19,850.11. However, in December 2017, it decreased to $7,051, and in May 2021, it dropped to $30,000. Bitcoin reached its highest price of $64,800 on 14 April 2021. As of 19 August 2024, its price is $59,013, having risen by 126.13% in the past year.

Bitcoin's blockchain has never been hacked, but individuals can still be hacked if they give out sensitive information, such as their private keys. Several bitcoin exchanges have also been hacked, and in 2022, the collapse of FTX cost more than a million users billions of dollars in cumulative losses.

Who is a good fit for Bitcoin?

Bitcoin may be a good fit for you if you're looking to diversify your portfolio. Cryptocurrencies like Bitcoin provide an alternative to more common assets.

Bitcoin can be a good way to hold some assets outside of your home currency. It's also a good option if you want to have some assets that aren't denominated in your home currency.

However, it's important to remember that Bitcoin is a relatively new development and isn't yet widely adopted. It could be replaced by other more efficient digital currencies or regulated out of existence. As such, it's recommended that it's not the main focus of your investment strategy.

How much Bitcoin you include in your portfolio will depend on your risk tolerance. It's recommended that Bitcoin investments make up between 1% and 5% of your portfolio.

Bitcoin's advantages and disadvantages

Bitcoin Advantages and Disadvantages

Bitcoin is the world's first decentralised digital person-to-person cryptocurrency and is considered a revolution in the current currency and financial markets. It is a highly liquid investment asset that can be easily traded for cash or other assets. However, it is also prone to volatility, with large dips and spikes in price. Here is a list of advantages and disadvantages of investing in Bitcoin:

Advantages:

• Accessibility and liquidity: Bitcoin is an accessible and versatile currency that can be used to purchase goods and services from a growing list of places that accept it.
• Independence from central authority: As a decentralised currency, Bitcoin is not regulated by a single government or central bank, meaning governments cannot control it like they can with centralised fiat currencies.
• Lower inflation risk: Bitcoin undergoes predictable inflation at a halved rate every four years, and the blockchain system is infinite, so there is little need to worry about cryptos losing their value.
• New opportunities: Bitcoin and cryptocurrency trading is a young industry with new coins emerging regularly, presenting opportunities for significant profits.
• Minimalistic trading: Bitcoin trading is simpler and more flexible than stock trading and can be done at any time, with instant transactions.
• Lower fraud risks and transparency: Bitcoin transactions do not require users to disclose any confidential financial information, reducing the risk of fraud. At the same time, blockchain technology ensures transparency and security.
• Lower transaction fees: Bitcoin transactions have very low or no transaction fees, especially compared to financial intermediaries or digital wallets.

Disadvantages:

• Volatility: The price of Bitcoin is highly volatile, with drastic changes from month to month and even daily. This makes it a risky investment option.
• Lack of regulation: The lack of regulatory oversight in the market means that investing in Bitcoin is not protected by law and is susceptible to scams and fraud.
• Risk of loss: If a Bitcoin wallet is lost or corrupted, there is no way to recover the Bitcoins, which can result in a significant financial loss.
• Environmental concerns: Bitcoin mining requires a significant amount of energy, leading to concerns about the environmental impact of the process.
• Not accepted everywhere: Despite growing acceptance, Bitcoin is still not widely accepted and is banned in some countries, limiting where it can be spent.
• Possible government interference: While governments cannot take away Bitcoins, they can ban them, forcing wallets and companies to shut down and making access to Bitcoins difficult.
• Money laundering/black market: Bitcoins have been used for money laundering and black market operations due to the anonymity and security they provide.

How to invest in Bitcoin

Investing in Bitcoin can be done in several ways, each with its own unique aspects, advantages, and disadvantages. Here are some of the most common methods:

• Cryptocurrency Exchanges: You can purchase Bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, and Crypto.com. These platforms offer a variety of cryptocurrencies and carry different fees and consumer protections.
• Traditional Stockbrokers: A few traditional brokers, like Robinhood, Webull, TradeStation, and Fidelity, offer their customers the ability to buy and sell Bitcoin.
• Peer-to-Peer Money Transfer Apps: Cash transfer services like PayPal, Venmo, and Cash App allow users to purchase, store, send, and sell Bitcoin directly through their apps.
• Bitcoin Exchange-Traded Funds (ETFs): The SEC recently approved spot Bitcoin ETFs, which track the price of Bitcoin and can be traded on major exchanges. These ETFs provide easier access to Bitcoin for traditional investors.
• Bitcoin Wallets: You can buy and store Bitcoin in a digital wallet, either a hot wallet (hosted by an exchange or an independent provider) or a cold wallet (a small, encrypted portable device).
• Bitcoin ATMs: These work like regular ATMs and are often found in similar locations. They allow you to buy and sell Bitcoin but may charge higher fees.
• Investing in Crypto-Related Companies: Instead of buying Bitcoin directly, you can invest in companies with a focus on cryptocurrency, such as crypto exchanges, mining companies, or banks providing solutions for crypto companies.

Regardless of the method chosen, it is important to understand the risks involved with investing in Bitcoin. The cryptocurrency market is highly volatile, and prices can fluctuate dramatically. Additionally, Bitcoin and other cryptocurrencies are not insured or covered by the same regulatory protections as traditional securities. Therefore, it is generally recommended to only invest an amount you are willing to lose.

Frequently asked questions