Bitcoin: Investment Or Speculation?

Bitcoin is a cryptocurrency that uses blockchain technology as a means of payment. It was created in 2009 by a person or group of people under the pseudonym Satoshi Nakamoto. Bitcoin's value is highly volatile, and its usage is largely speculative. However, it has been increasingly mentioned alongside traditional safe-haven assets. Bitcoin's decentralised nature makes it an attractive investment option for those seeking an alternative to traditional currencies.

Bitcoin's volatility

Bitcoin's price has been extremely volatile, rising to nearly $20,000 by the end of 2017 and then dropping to less than $4,000 by the end of 2018. In 2020, its value dropped by about half from the middle of February to mid-March, but it jumped to nearly $11,500 five months later. These price swings tend to be greater than those of gold, so the digital currency cannot be viewed as a stable store of value.

However, some argue that Bitcoin is a currency or synthetic commodity money, not a speculative investment. Its volatility can be beneficial, offering diversification benefits to investors in stock markets during crises such as the COVID-19 pandemic.

The extreme price volatility is both an incentive for and a substantial obstacle to market participation. It can also lead to speculative bubbles, where new investors keep the price of a safe-haven asset rising, although they buy at an increasingly high cost.

The volatility of Bitcoin is also linked to its status as a relatively new asset. As a fledgling endeavour, it has endured wild price swings during its almost decade-long tenure. As the entire crypto ecosystem matures, liquidity may increase, and wild price swings may smooth out.

Bitcoin as a safe haven

Bitcoin is increasingly being viewed as a safe haven asset, alongside traditional safe havens such as gold. This is despite the fact that Bitcoin is more volatile, less liquid, and costlier to transact than other assets, including gold, even under normal market conditions.

During the Covid-19 pandemic, Bitcoin mostly followed the stock markets and depreciated in the early stages of the pandemic, before rallying following a new wave of quantitative easing. Since then, Bitcoin has been contractive, but it has still delivered staggering 300% gains, rallying above $60k in 2021, before correcting to the $20k level.

Bitcoin's resilience in the face of economic turmoil has led some to view it as the ultimate safe-haven asset. During the turbulent past four years, which saw a global pandemic, supply chain bottlenecks, soaring inflation, and interest rate hikes, Bitcoin outperformed gold and U.S. Treasuries, rising by nearly 1,000%.

However, Bitcoin's status as a safe haven is not universally accepted. Critics argue that Bitcoin is too volatile to be considered a safe haven. Bitcoin has registered declines of 50% or more several times throughout its history, and its high volatility has been identified as one of the main operational problems for Bitcoin.

Nevertheless, Bitcoin's limited supply, decentralised payment network, and resilience in the face of economic uncertainty have led some investors to view it as a safe haven, and it may continue to gain traction as a safe-haven asset in the years to come.

Bitcoin vs gold

Bitcoin and gold are often compared as potential investment assets. Both have been used as a store of value and a hedge against market downturns. However, there are several key differences between the two.

Gold has been used as a means of exchange and a store of wealth for thousands of years, while Bitcoin was only launched in 2009 and achieved widespread recognition several years later. Gold has a well-established system for trading, weighing, and tracking, and it is highly regulated. In contrast, Bitcoin is a decentralized digital currency based on blockchain technology. While it is generally legal to use Bitcoin across borders, the regulatory infrastructure to protect users is not yet fully in place in many countries.

One of the main advantages of gold is its diverse range of applications, including currency, luxury items, dentistry, and electronics. This cross-functional utility has helped gold maintain its value over time. On the other hand, Bitcoin's utility is currently limited to digital currency and speculative investment. However, there is potential for Bitcoin to be used more widely in financial transactions through decentralized finance.

Another key difference is the finite supply of each asset. While gold is presumed to have a finite supply, its availability can be influenced by mining activities and new discoveries. Bitcoin, on the other hand, has a set limit of 21 million coins that cannot be changed.

In terms of investment performance, gold has historically been seen as a safe haven during times of high inflation and market stress. However, since the 1970s, gold has not kept pace with inflation, and its performance has been relatively lacklustre. Bitcoin, on the other hand, has seen significant price appreciation, with annual returns of 44% over the past decade. Bitcoin's volatility is well-known, but as the asset class matures, this volatility is expected to diminish.

The decision to invest in Bitcoin or gold depends on various factors, including risk tolerance, investment goals, and strategy. Gold is a more established and regulated investment, while Bitcoin is younger and more volatile but has shown impressive returns.

Bitcoin's finite supply

The limited supply of Bitcoin is intended to prevent currency value manipulation and inflation, which can occur when the money supply is increased. By capping the supply, Bitcoin's creator, Satoshi Nakamoto, aimed to ensure that the value of the currency could not be diluted over time. This scarcity also tends to increase demand and price.

As of December 2023, there were approximately 19.57 million bitcoins in existence, with about 1.45 million left to be rewarded. However, due to the use of rounding operators in the Bitcoin codebase, it is unlikely that the total number of bitcoins issued will ever reach 21 million. The final bitcoin is not expected to be generated until around 2140.

The finite supply of Bitcoin has had a significant impact on its value. As a finite resource, similar to gold, Bitcoin becomes increasingly valuable as demand rises and the available supply decreases. This dynamic has been further influenced by "HODL" enthusiasts, who hold onto their bitcoins for the long term, reducing the number of coins in circulation and driving up their value.

While the future of Bitcoin is uncertain, it is clear that its finite supply will continue to shape its role as a potential investment or speculative vehicle.

Bitcoin's decentralisation

Decentralisation is a key feature of Bitcoin and other cryptocurrencies. In a decentralised market, technology enables investors to deal directly with each other instead of operating from within a centralised exchange.

Decentralisation in blockchain systems has several benefits. It reduces the level of trust that participants must place in one another, and makes it difficult for any one member to exert control over the others. It also improves data reconciliation, reduces points of weakness, and optimises the distribution of resources.

However, there are also trade-offs to decentralisation. Decentralised blockchain systems tend to prioritise security over performance, so they can become slower as more members are added. Additionally, the lack of regulatory oversight in decentralised markets can be seen as a benefit by some, but it also means there are no governing authorities to monitor transactions, offer assistance, or provide a legal framework.

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