Bitcoin's Future: Worth The Investment?

Bitcoin is a highly controversial investment option. On the one hand, it has offered the potential for high returns, and its decentralised nature means it can be a non-correlated asset, similar to gold. On the other hand, it is a risky investment with high volatility and lacks regulation.

Bitcoin's value is highly volatile, and its price can fluctuate drastically. For example, investors who bought Bitcoin in December 2017 at $20,000 saw its value decrease to $7,051 just weeks later. Its value is also influenced by various factors such as market demand, government regulations, technological advancements, and investor sentiment.

Another point of contention is Bitcoin's status as a currency. Critics argue that it is too inefficient to function as a means of payment, while supporters claim that it is more efficient than credit cards.

Ultimately, investing in Bitcoin is a personal decision. It is important to understand the potential benefits and risks before making an informed decision.

Bitcoin's volatility

Bitcoin is a volatile asset, and its price can fluctuate significantly over time. Volatility is a measure of how much the price of a financial asset varies, and it is often associated with riskier investments. Bitcoin's volatility is driven by speculation, as investors bet on its price going up or down, leading to sudden price surges or drops.

The high volatility of Bitcoin means that it is a risky investment, and investors need to be aware of the potential for significant losses as well as gains. Volatility also impacts the cost of hedging, contributing to the price of merchant services. If Bitcoin's volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

While Bitcoin's volatility can be a concern, some investors welcome it as it has historically led to high returns. Bitcoin's Sharpe ratio of 0.96 from 2020 to early 2024 indicates that investors have been compensated for the risk taken. Additionally, Bitcoin's Sortino ratio of 1.86 suggests that much of the volatility has been on the upside, with more instances of the price moving up quickly rather than down.

Overall, Bitcoin's volatility is a key aspect of its nature as a relatively new asset class. As Bitcoin matures and its market cap grows, its volatility is expected to continue declining. However, investors should carefully consider their risk tolerance and financial position before investing in Bitcoin.

Bitcoin's potential as a payment method

Bitcoin is the first and largest cryptocurrency by market cap. It was created in 2009 as a decentralised digital currency, allowing for peer-to-peer transactions without the need for intermediary parties like banks or payment processors. Bitcoin's technology is based on blockchain, a public ledger that records every transaction.

One of the key advantages of Bitcoin as a payment method is its speed and accessibility. With just a phone or computer, people can send funds almost instantly to anyone, anywhere in the world. This has led to growing acceptance among merchants and online retailers, with Bitcoin being accepted by most top stores and services. Cryptocurrency payment gateways have also emerged to facilitate transactions between merchants and customers, removing the need for merchants to set up their own cryptocurrency wallets.

Another advantage of Bitcoin as a payment method is security. All transactions use a "push" payment mechanism, meaning funds cannot be pulled from a user's account without their permission. This makes it impossible to forge transactions or make payments without the user's consent.

However, there are also drawbacks and risks associated with Bitcoin as a payment method. Cryptocurrency wallets can be hacked, and there is a risk of losing funds if credentials are lost or forgotten. Additionally, Bitcoin and other cryptocurrencies are highly volatile, and their value can fluctuate significantly.

While Bitcoin has the potential to become a widely accepted payment method, it currently faces competition from traditional payment methods and other cryptocurrencies. It also faces regulatory challenges and environmental concerns related to its energy consumption.

Overall, Bitcoin's potential as a payment method depends on its ability to maintain security, increase adoption, and overcome regulatory and environmental hurdles. Its unique features, such as speed, accessibility, and security, make it a promising payment method, but it also faces significant challenges and risks.

Bitcoin's environmental impact

Energy Consumption and Electronic Waste

Bitcoin mining consumes an estimated 140 Terawatt-hours (TWh) of electricity annually, which is about 0.63% of global electricity use. This amount of energy is more than that used by some individual countries, such as Pakistan and Ukraine. Over 77 kilotons of electronic waste are produced annually as a byproduct of Bitcoin mining, and the energy consumption leads to significant carbon emissions.

Climate Impact

The large amount of energy consumed by Bitcoin mining results in substantial carbon emissions and climate damages. A 2022 study estimated that each $1 of Bitcoin market value created was responsible for $0.35 in global climate damages. The study further concluded that Bitcoin's climate damages were an order of magnitude higher than those of wind and solar power generation.

Energy Sources

The energy used for Bitcoin mining often comes from fossil fuels. The three countries with the largest share of Bitcoin mining (the US, China, and Kazakhstan) are heavily dependent on fossil fuels, particularly coal and natural gas. As a result, Bitcoin mining contributes to global carbon emissions and associated environmental damages.

Comparison to Other Sectors

When compared to other economic sectors and commodities, Bitcoin's climate damages as a share of its market price are similar to those of energy-intensive or heavily polluting industries such as beef production, natural gas generation, and gasoline consumption. Bitcoin's climate damages per unit market price are significantly higher than those of renewable energy sources like solar and wind power.

Potential Solutions

One potential solution to reduce the environmental impact of Bitcoin is to switch from the energy-intensive proof-of-work consensus mechanism to a less energy-intensive alternative, such as proof-of-stake. This change could dramatically reduce Bitcoin's power usage. Additionally, increasing the use of renewable energy sources for Bitcoin mining could help mitigate its climate impact.

Bitcoin's security

Bitcoins Security

Bitcoin can provide very high levels of security if used correctly. However, it is the user's responsibility to adopt good practices to protect their money.

Online Services

Be wary of any service designed to store your money online. Many exchanges and online wallets have suffered security breaches in the past. Generally, these services still do not provide enough insurance and security to be used to store money like a bank.

Amounts for Everyday Use

A Bitcoin wallet is like a physical wallet. It is good practice to keep only small amounts of Bitcoin on your computer, mobile, or server for everyday use, and to keep the rest of your funds in a safer environment.

Backups

Stored in a safe place, a backup of your wallet can protect you against computer failures and human error. It can also allow you to recover your wallet if your mobile or computer is stolen, provided you keep your wallet encrypted.

It is important to back up your entire wallet, as some wallets use many hidden private keys internally. If you only have a backup of the private keys for your visible Bitcoin addresses, you may not be able to recover most of your funds.

Encryption

Any backup stored online is highly vulnerable to theft. Even a computer connected to the internet is vulnerable to malicious software. As such, encrypting any backup exposed to the network is a good security practice.

Locations

Single points of failure are bad for security. If your backup is not dependent on a single location, it is less likely that any bad event will prevent you from recovering your wallet. It is recommended to use different media like USB keys, paper, and CDs.

Passwords

It is important to use a strong password. Any password that contains only letters or recognisable words can be considered very weak and easy to break. A strong password must contain letters, numbers, punctuation marks, and be at least 16 characters long. The most secure passwords are those generated by specific programs.

Offline Wallets

An offline wallet, also known as cold storage, provides the highest level of security for savings. It involves storing a wallet in a secure place that is not connected to the network. When done properly, it can offer good protection against computer vulnerabilities. Using an offline wallet in conjunction with backups and encryption is also a good practice.

Software

Using the latest version of your Bitcoin software allows you to receive important stability and security fixes. Updates can prevent problems of varying severity and help keep your wallet safe.

Multi-Signature

Bitcoin includes a multi-signature feature that allows a transaction to require multiple independent approvals to be spent. This can be used by an organisation to give its members access to its treasury while only allowing a withdrawal if 3 of 5 members sign the transaction. Some web wallets also provide multi-signature wallets, allowing the user to keep control over their money while preventing a thief from stealing funds by compromising a single device or server.

Bitcoin's performance in 2024

However, there are also several factors that could lead to a decline in Bitcoin's price. The excitement surrounding spot bitcoin ETFs has already started to fade, with Bitcoin's price dropping below $63,000 by May. Additionally, there are concerns about Bitcoin's long-term security and the impact of inscriptions on the bitcoin blockchain, which could congest the network and complicate the mining process. Environmental considerations are also a factor, as Bitcoin continues to face criticism for its energy consumption.

Overall, Bitcoin's performance in 2024 will depend on various factors, including institutional adoption, regulatory changes, and macroeconomic trends. Analysts predict a potential high of around $120,000 and a potential low of around $35,000 for the year.

Frequently asked questions