Bitcoin: High-Risk, High-Reward Investment Strategy

Bitcoin is a highly controversial investment option. Its value is derived from the fact that it is the most successful virtual currency today, with a constantly shifting market. However, it is also incredibly volatile, with a high risk of investors losing money due to its unpredictable nature. Bitcoin is also susceptible to cyberattacks and fraud, with little to no regulation in the market. This means that if an investor loses their Bitcoin, they have no place to file a claim or complaint.

Volatile market

Bitcoin is a highly volatile asset. Its price is constantly changing, and there is no telling whether you will get a return on your investment. For example, on 6 November 2018, one bitcoin was worth $6,461.01. Ten days later, on 17 December, the price topped $20,000. But a week later, on 24 December, buyers could not sell their investment for more than $14,626.

The cryptocurrency market is incredibly young and unpredictable. It is not uncommon for the price of Bitcoin to experience wild swings within a day or even within minutes. This makes trading a dangerous venture.

The volatility of Bitcoin is due to its young age and the fact that it is not backed by anything. Bitcoin has value only because people who are trading it say it has value. There are no governments or regulatory bodies helping Bitcoin retain its value. The value is all "made up".

As a result of its volatility, investing in Bitcoin is high-risk and speculative. It is possible to invest a lot of money in Bitcoin and lose it all within hours. If you lose your Bitcoin investment, there is no place to file a claim or complaint.

Susceptible to hacking

Bitcoin is a decentralised digital currency that uses cryptography to secure transactions and ownership information. It is recorded in a digital ledger called a blockchain.

While the blockchain technology that underpins Bitcoin is considered secure, there are still vulnerabilities in the cryptocurrency network that hackers can exploit. For example, hackers can gain access to cryptocurrency owners' wallets, exchange accounts, or the exchanges themselves.

One of the most significant threats to blockchains is a 51% attack, where a single individual or organisation takes control of the majority of the network's mining power (hashrate). This would allow them to change and overwrite the transaction history of the network, enabling double-spending. However, such an attack is extremely difficult to achieve and highly unlikely due to the high costs and specialised hardware required.

Another potential vulnerability lies in the interfaces, such as wallets, where cryptocurrencies are handled. These are still vulnerable to attacks as they are much easier targets than the blockchain itself. Additionally, there is always the possibility of a fundamental vulnerability being discovered in the way the encryption works or in some other aspect of the cryptocurrency network.

To protect their investments, cryptocurrency owners should take steps to secure their private keys, passwords, and other sensitive information. Reputable exchanges can also offer "deep cold storage" options, which are offline data storage units with enterprise-level security.

Lack of regulation

Bitcoin is a highly risky investment due to its lack of regulation. The market is operating without any major regulations, and governments and central banks are still figuring out how to react to the introduction of bitcoin and other cryptocurrencies. The lack of regulation means that investors are vulnerable to cyber threats, online fraud, and the system being shut down. There is also no physical collateral to back up the investment, as bitcoin is 100% technology-based.

The lack of clear and consistent regulation across the world makes bitcoin a risky investment. The US, for example, has largely chosen not to acknowledge the growing trend, leaving it to individual states to determine how their citizens can participate. On the other hand, Europe has quickly built laws and regulatory bodies to guide the young fintech industry. Switzerland has embraced cryptocurrency in a non-regulatory manner, while Germany has chosen to tax cryptocurrency trades.

Asia's stance on bitcoin and cryptocurrencies varies widely. Japan is one of the most cryptocurrency-positive countries, recognizing bitcoin as a legal means of payment. In contrast, some Asian countries like Bangladesh, Nepal, and Kyrgyzstan have made using or trading virtual currencies highly illegal and punishable. China, once an early adopter in the blockchain space due to a lack of regulation, imposed strict regulations on bitcoin trading in 2021.

Australia has also struck a balance in how it handles blockchain technology and speculative cryptocurrencies. By labeling bitcoin as "money," Australia can tax those who trade with it, while also building special boundaries to guide the country's ICO sector.

The lack of regulation in the bitcoin market could lead to problems if bitcoin becomes competition for government currency. While it is not currently a widely accepted currency, the future is ever-changing, and the state of the bitcoin market could look very different in a few years.

Technology reliance

Bitcoin is a technology-reliant investment. As a cryptocurrency, it is entirely reliant on technology, and without it, it is worth nothing. Bitcoin is mined, exchanged, and stored digitally, and there is no physical collateral to back it up. This makes bitcoin owners more vulnerable to cyber threats and online fraud.

Bitcoin is a decentralised cryptocurrency, meaning it operates without central oversight. Transactions are verified and recorded on a public distributed ledger, called a blockchain. This is a digital ledger for storing data, including financial transactions. Blockchain is a cloud-based shared database, making it easy to store unlimited data. It is decentralised, meaning information is not stored on physical servers.

The process of mining bitcoin consumes large quantities of electricity, and it has been criticised for its environmental impact. Mining also requires significant computational power and specialised hardware. Miners are rewarded with bitcoin for their efforts.

The blockchain is maintained by a peer-to-peer network, and each node in the network must be verified. This is done through cryptography, which is complex and computationally intensive. Each block in the blockchain contains a hash of the previous block, and the blockchain is updated across all nodes without central oversight. This process tracks bitcoin spending and ensures each bitcoin is spent only once.

Bitcoin transactions use a scripting language, with one or more inputs and outputs. To prevent double-spending, each input must refer to a previous unspent output in the blockchain. If a private key is lost, access to the bitcoins is lost, and there is no other proof of ownership.

Bitcoin is pseudonymous, meaning funds are linked to addresses, not real-world identities. While owners of addresses are not directly identified, all transactions are public. For enhanced privacy, users can generate a new address for each transaction.

Disaster-proof concerns

Bitcoin is often touted as a disaster-proof investment, but there are some concerns about its resilience in the face of major crises.

Firstly, Bitcoin is a digital currency that relies on technology and the internet to function. In the event of a global catastrophe or apocalyptic event, the internet and electricity infrastructure could be knocked out, rendering Bitcoin inaccessible. While some argue that Bitcoin would still be safe as long as someone is maintaining the blockchain and the user has their private keys, without power and internet access, it would be challenging to retrieve and use Bitcoin.

Secondly, in the case of a complete societal collapse, basic survival needs like food, water, and shelter would take precedence over any form of currency, including Bitcoin. In such a scenario, tangible assets like gold or supplies for bartering may be more valuable than a digital currency.

Thirdly, while Bitcoin is decentralised and not directly controlled by any centralised authority or country, it is still vulnerable to broader economic and political forces. For example, if fiat currencies or traditional financial systems fail, governments and central banks are more likely to turn to holding tangible assets like gold rather than cryptocurrencies.

However, some argue that Bitcoin has shown resilience in times of political upheaval and economic crises. For instance, during the recent peaceful coup in Zimbabwe and the economic collapse in a South American country, the demand for Bitcoin and cryptocurrency mining surged.

Additionally, blockchain technology, which underpins Bitcoin, is designed to be decentralised and distributed. Rob Harvey, a Bitcoin investor who prepares for natural and nuclear disasters, notes that even if the blockchain is inaccessible for a while during a disaster, it will eventually return as it was before since it doesn't depend on a specific place or person to survive.

Overall, while Bitcoin may offer some advantages as a disaster-proof investment, there are valid concerns about its reliability in extreme scenarios. In the event of a global catastrophe or societal collapse, access to Bitcoin could be disrupted, and other assets may be prioritised for survival and value retention.

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