Bitcoin Investment: A Con Or A Legit Opportunity?

Bitcoin is a cryptocurrency, a virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. Bitcoin can be used as a currency or an investment. However, it is important to note that investing in Bitcoin exposes you to a volatile asset class, and there are several pros and cons to consider. In this article, we will explore the risks and potential benefits of investing in Bitcoin and discuss whether it is a good addition to your investment portfolio.

Bitcoin's volatility

Bitcoins Volatility

Bitcoin is considered a volatile investment asset, with daily fluctuations of 5% being ordinary, and occasional double-digit price moves. On 19 May 2021, its price fell nearly 30%, and it dropped over 60% from November 2021 to May 2022.

Bitcoin's energy consumption

The high energy consumption of Bitcoin is due to the proof-of-work algorithm that it uses to validate transactions and secure its network. Bitcoin mining involves solving complex cryptographic puzzles that require significant computational power and electricity to operate the machines and cool the equipment. As a result, Bitcoin mining facilities are constantly seeking ways to acquire substantial amounts of power at the lowest possible cost.

The energy used by Bitcoin miners comes primarily from fossil fuels, which further contributes to the carbon footprint of the Bitcoin network. According to a study, the share of renewable energy powering the Bitcoin network decreased from 41.6% to 25.1% after the mining crackdown in China in 2021, as miners moved to countries like the US and Kazakhstan, which rely more on coal and gas-based electricity.

The high energy consumption of Bitcoin has led to concerns about its environmental impact and sustainability. Critics argue that the emissions and energy usage associated with Bitcoin mining are not worth the benefits it provides. However, supporters of Bitcoin argue that the network is increasingly being powered by renewable energy sources, and that the benefits of Bitcoin justify its energy usage.

To address the energy consumption and environmental concerns, there have been calls for Bitcoin to move away from the energy-intensive proof-of-work consensus mechanism to a less energy-intensive alternative, such as proof-of-stake. Ethereum, another cryptocurrency, has already made this transition, reducing its electrical usage by over 99.9%.

Bitcoin's use in illegal activity

Bitcoin is often criticised for its use in illegal activity. Government officials worry that cryptocurrencies are enabling dark web purchases, money laundering, and other illegal activity. However, the majority of cryptocurrency is not used for criminal activity. According to an excerpt from Chainalysis’ 2021 report, in 2019, criminal activity represented 2.1% of all cryptocurrency transaction volume (roughly $21.4 billion worth of transfers). In 2020, the criminal share of all cryptocurrency activity fell to just 0.34% ($10.0 billion in transaction volume).

According to a study by the University of Sydney and the University of Technology Sydney, approximately one-quarter of bitcoin users are involved in illegal activity. The study estimates that around $76 billion of illegal activity per year involves bitcoin (46% of bitcoin transactions), which is close to the scale of the U.S. and European markets for illegal drugs.

The illegal share of bitcoin activity declines with mainstream interest in bitcoin and with the emergence of more opaque cryptocurrencies. The study also found that illegal users tend to transact more, but in smaller transactions. They are also more likely to repeatedly transact with a given counterparty.

Bitcoin's lack of intrinsic value

Bitcoin is a cryptocurrency, a virtual currency, that is not backed by any physical commodity or government. It is a digital asset that exists only within computer networks. Its value is based purely on what people are willing to pay for it, and its price has fluctuated wildly since its creation in 2009.

The question of whether Bitcoin has intrinsic value is hotly contested. Some argue that Bitcoin has no intrinsic value because it is not backed by anything tangible or any government or company. It is a purely speculative investment, and its value is based solely on supply and demand. Bitcoin devotees, on the other hand, believe that its value comes from its scarcity and the fact that it is decentralized, meaning it cannot be controlled by a single entity.

Bitcoin's value is based on the belief that it will continue to be accepted as a medium of exchange and a store of value. However, it is not widely accepted as a means of payment, and its extreme volatility makes it an unreliable medium of exchange.

Bitcoin's value is also influenced by its limited supply. There will only ever be 21 million bitcoins, and this scarcity creates a relationship between supply and demand that is difficult to manipulate. However, critics argue that scarcity alone is not enough to justify its value.

Another argument for Bitcoin's intrinsic value is its utility as a store of value. During the COVID-19 pandemic, some investors turned to Bitcoin and experienced tremendous gains. However, this argument is countered by the fact that Bitcoin is a convertible currency. It must be converted to a government-backed currency to be used, even in countries where it is recognized as legal tender.

In conclusion, the debate around Bitcoin's intrinsic value is complex and multifaceted. While some argue that it has value due to its scarcity, decentralization, and utility as a store of value, others maintain that it has no intrinsic value because it is not backed by anything tangible and is subject to extreme volatility. Ultimately, the value of Bitcoin depends on what people are willing to pay for it, and its future remains uncertain.

Bitcoin's security and privacy

Bitcoin is often perceived as an anonymous payment network, but in reality, it is perhaps the most transparent payment network in the world. Bitcoin can provide acceptable levels of privacy when used correctly. It is the user's responsibility to adopt good practices to protect their privacy.

Understanding Bitcoin Traceability

Bitcoin works with an unprecedented level of transparency that most people are not used to dealing with. All Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent. These addresses are created privately by each user's wallets. However, once addresses are used, they become tainted by the history of all transactions they are involved with. Anyone can see the balance and all transactions of any address. Since users usually have to reveal their identity to receive services or goods, Bitcoin addresses cannot remain fully anonymous. As the blockchain is permanent, it's important to note that something not traceable currently may become trivial to trace in the future. For these reasons, Bitcoin addresses should only be used once, and users must be careful not to disclose their addresses.

Use new addresses to receive payments

To protect your privacy, you should use a new Bitcoin address each time you receive a new payment. Additionally, you can use multiple wallets for different purposes. Doing so allows you to isolate each of your transactions in such a way that it is not possible to associate them all together. People who send you money cannot see what other Bitcoin addresses you own and what you do with them. This is probably the most important advice you should keep in mind.

Be careful with public spaces

Unless you intend to receive public donations or payments with full transparency, publishing a Bitcoin address on any public space, such as a website or social network, is not a good idea when it comes to privacy. If you choose to do so, always remember that if you move any funds with this address to one of your other addresses, they will be publicly tainted by the history of your public address. Additionally, you might also want to be careful not to publish information about your transactions and purchases that could allow someone to identify your Bitcoin addresses.

Your IP address can be logged

Because the Bitcoin network is a peer-to-peer network, it is possible to listen for transaction relays and log their IP addresses. Full node clients relay all users' transactions as if they were their own. This means that finding the source of any particular transaction can be difficult, and any Bitcoin node can be mistaken as the source of a transaction when they are not. You might want to consider hiding your computer's IP address with a tool like Tor so that it cannot be logged.

Limitations of mixing services

Some online services called mixing services offer to mix traceability between users by receiving and sending back the same amount using independent Bitcoin addresses. It is important to note that the legality of using such services might vary and be subjected to different rules in each jurisdiction. Such services also require you to trust the individuals running them not to lose or steal your funds and not to keep a log of your requests. Even though mixing services can break traceability for small amounts, it becomes increasingly difficult to do the same for larger transactions.

Bitcoin Security

Bitcoin is one of the safest blockchain networks. The network has four factors that contribute to this:

• Transaction hashing
• Bitcoin mining and proof of work
• Additional transaction block confirmations
• Game theory

When you send bitcoin over the Bitcoin network, that transaction is encrypted into a random string of letters and numbers called a "hash". A hash is a unique code used in cryptography, hence the word cryptocurrency. Bitcoin uses a much stronger hash algorithm called SHA-256.

Once you’ve sent bitcoin from one wallet address to another, the blockchain has to update and show that the receiving wallet now owns the coins. This happens in the mining process, which “confirms” transactions on the network through a series of steps.

First, your transaction is grouped into a block of about 2,000 other unconfirmed transactions. That block is locked by an insanely complex cryptographic puzzle that only powerful computers can solve. Next, miners compete to solve the puzzle through a process called “proof of work” (PoW). The first miner to prove to the network that they have solved the puzzle wins freshly minted bitcoins, along with the transaction fees of every transaction in the block. In doing so, the miner “confirms” the transaction block on the blockchain.

It takes about ten minutes for miners to solve the PoW puzzle and confirm a block of bitcoin transactions. If an attacker wanted to reverse your bitcoin transaction, they’d need more than half the computing power of the entire bitcoin network to out-muscle the other miners. That's possible in theory – but so far, nobody’s done it.

By the time six blocks are confirmed – about an hour after your transaction started – there’s simply no mathematical way for someone to steal that bitcoin through a network attack.

The Bitcoin network’s security is multi-layered. Transaction hashing, mining, block confirmations, and game theory all work together to make Bitcoin’s blockchain impenetrable. Since the first transaction block in 2009, the network has never once shut down – and no bitcoin has ever been stolen from the blockchain. Bitcoin’s track record of security speaks for itself.

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