Bitcoin: Best Investment Or Risky Gamble?

Bitcoin is the world's largest cryptocurrency and has gained impressive success, continuing to soar in popularity. The data shows that the number of Bitcoin users grew by 44% in just one year, and there are currently 100 million Bitcoin wallets with value. Bitcoin has consistently surpassed its all-time highs and is considered an inflation hedge due to its limited supply. Its ease of trading makes it accessible to investors of all experience levels. However, critics argue that bitcoin doesn't work as a currency, citing concerns like volatility, energy usage, and use in illegal activity.

Bitcoin's growth and track record

Bitcoin has consistently surpassed its most recent all-time highs, achieving full recovery after a price crash or other setbacks. For example, in May 2016, you could buy one bitcoin for about $500. As of August 2024, a single bitcoin's price was around $55,175, a growth of 10,935%. In 2017, Bitcoin was trading at $1,000. By the end of the same year, Bitcoin hit highs of $20,000, amounting to growth of 1,900% in just 12 months. Bitcoin has also hit all-time highs of over $68,000.

Bitcoin's growth has been significant, and it has outperformed traditional assets like stocks and real estate. Its five-year growth stands at 317%, compared to 38% for the Dow Jones index and 17% for the Russell 2000. Bitcoin's long-term trajectory has been positive, but it does go through bearish cycles, and investors should be aware of its volatility.

Bitcoin's liquidity and low fees

Bitcoin's liquidity is influenced by several factors. Liquidity refers to the ability to convert assets into cash quickly and cost-effectively. While Bitcoin trades 24 hours a day, it is less liquid than other asset classes. Transacting in Bitcoin can come with extra costs and time delays.

Bitcoin's average 24-hour trading volume was between $9 billion and $100 billion in the first few months of 2024. In comparison, the average turnover in the forex market was about $7.5 trillion daily in 2022. The more an item is bought and sold, the more competitive the market becomes, increasing trade volume, which is a good indicator of Bitcoin liquidity.

The number of trusted Bitcoin exchanges has increased over time, allowing more people to trade their coins and enhancing liquidity. Additionally, the increased acceptance of Bitcoin at brick-and-mortar stores, online shops, and other businesses can boost its usability and reduce its volatility. The more Bitcoin is used as a medium of exchange, the more liquid it becomes.

The launch of Bitcoin-to-cash payment cards and ATMs also boosts the usability and acceptance of Bitcoin, increasing liquidity while maintaining security. Cryptocurrency ATMs are important for wider acceptance as they facilitate buying Bitcoins, and many people are uncomfortable with online exchange transactions. However, crypto ATMs are known for their high fees, with some charging up to 10% per transaction.

Regulations also play a crucial role in Bitcoin liquidity. The stance of countries on Bitcoin varies, with some banning it, some allowing it, and others disputing it. A clear stance by authorities on issues like consumer protection and taxation could interest more people in using Bitcoin, positively affecting its liquidity.

Bitcoin does have liquidity, but it is much lower than that of the currency trading market. Tether (USDT), a stablecoin pegged to the US dollar, had a higher 24-hour trading volume than Bitcoin on March 17, 2024, despite a smaller market cap. This higher trading volume gave Tether more liquidity.

Bitcoin's low liquidity is one of the factors contributing to its volatile nature and sudden price movements. Therefore, improved liquidity can help reduce Bitcoin's risks.

Bitcoin's inflation risk compared to traditional currencies

Bitcoins Inflation Risk Compared to Traditional Currencies

Bitcoin is often touted as a hedge against inflation, with the assumption that fiat money will eventually decrease in value due to central bank money printing. On the contrary, Bitcoin has a fixed supply of 21 million coins. The restricted upper limit gives Bitcoin an advantage against inflation.

However, Bitcoin is still subject to inflation. As more Bitcoin is mined, its value increases, similar to gold. But, given that mining for new Bitcoin is automatically reduced by 50% every four years, inflation rates are also bound to decrease eventually.

Bitcoin's fixed supply and decentralised nature make it a good hedge against inflation. When an asset's supply is fixed, it means that new coins cannot enter circulation, eliminating the risk of inflation.

Additionally, Bitcoin is not tied to a specific economy or currency. It is an international asset class that reflects global demand. This makes it a better option than equities, which are subject to the economic and political risks associated with stock markets.

Scarcity is key to making an asset resistant to inflation. Bitcoin's limited supply ensures that its value will remain steady over time, which is why it is often referred to as "digital gold".

Bitcoin is technically an inflationary currency because it was designed to mimic the stable inflation rate of gold. However, Bitcoin cannot be deflationary because its supply will not decrease. Instead, its supply will steadily increase until it reaches a hard cap of 21 million coins, projected to happen in 2140.

While Bitcoin can be considered an "inflation-resistant" asset, it is not completely impenetrable to outside changes. As the largest and most established cryptocurrency, Bitcoin is generally considered a good inflation hedge, and may even be better than gold.

High inflation rates for fiat currencies might lead people to invest more in crypto because their savings accounts are losing value over time. Cryptocurrencies like Bitcoin may have relatively lower monetary inflation rates, providing an attractive alternative for investors.

While Bitcoin has attributes that make it more immune to inflation over the long term, it is still subject to inflationary pressures and is influenced by the broader economic landscape.

Simplified trading of Bitcoin

Trading Bitcoin can be done in several ways, each with its own pros and cons. Here are some of the most common methods:

Cryptocurrency Exchanges:

Cryptocurrency exchanges like Gemini, Kraken, Coinbase, and Crypto.com allow you to purchase Bitcoin and other cryptocurrencies. These platforms usually offer a wide range of features and competitive fees. However, it's important to do your research before choosing an exchange as they can vary in terms of security, consumer protection, and fees.

Traditional Stockbrokers:

A few traditional investment brokers, such as Robinhood, Webull, TradeStation, and Fidelity, offer their customers the ability to buy and sell Bitcoin. These platforms may be a good option for those who are already familiar with stock trading and prefer a more regulated environment.

Money Transfer Apps:

Cash transfer services like PayPal, Venmo, and Cash App allow users to purchase, store, and sell Bitcoin directly within their apps. This option can be convenient for those who are already using these platforms for other financial transactions.

Bitcoin ATMs:

Bitcoin ATMs are physical machines that allow you to buy and sell Bitcoin with cash. They are often placed in locations such as convenience stores and operate similarly to traditional ATMs. However, it's important to consider the fees associated with these transactions, as they can be relatively high.

Bitcoin Exchange-Traded Funds (ETFs):

A Bitcoin ETF is a fund that tracks the price of Bitcoin and can be traded on major exchanges. This option became available in January 2024 and provides a way for traditional investors to gain exposure to Bitcoin without directly purchasing the cryptocurrency.

Peer-to-Peer (P2P) Exchanges:

P2P exchanges, such as LocalBitcoins, allow users to buy and sell Bitcoin directly with each other. These platforms often provide rating systems for traders and offer more anonymity compared to centralized exchanges.

Regardless of the method you choose, it's important to understand the risks and volatility associated with Bitcoin and other cryptocurrencies. Additionally, it's crucial to prioritize the security of your Bitcoin holdings by using secure digital wallets and following best practices to protect your private keys.

Bitcoin's decentralisation and lack of government control

Bitcoin is a decentralized cryptocurrency, meaning it operates without a central authority or administrator. Transactions are verified and recorded on a public distributed ledger, called a blockchain, by a peer-to-peer network of nodes. This network reaches consensus through a computationally intensive process called mining, which is based on proof of work.

Bitcoin's decentralized nature means it cannot be controlled by a single government, central bank, or company. This is a key feature that advocates believe will protect it from both inflation and dictators, making it revolutionary.

The lack of central control means that intermediaries, such as banks and financial institutions, are not required to manage and distribute the currency. Transactions are instead automated peer-to-peer transfers between two parties on the Bitcoin network. This makes it faster and cheaper to transfer money, and the system does not crumble at a single point of failure.

Bitcoin's decentralized system also has the potential to rearrange the current financial system. The power to increase or decrease the currency supply would no longer be appointed to a single group of authorities, and the role of governments in managing and regulating economic policy through intermediaries may become superfluous.

However, some critics argue that Bitcoin's decentralized nature is a drawback. Economist Paul Krugman, for example, argues that cryptocurrencies like Bitcoin are only used by bank skeptics and criminals. The lack of intermediaries also means that there is no central authority to regulate or trace transactions, making it harder to prevent misuse or illegal activity.

The decentralized nature of Bitcoin and other cryptocurrencies is one of the key reasons why governments are wary of them. Established authorities will continue to view Bitcoin with distrust until they can more effectively monitor and control it.

Frequently asked questions