Is Bitcoin Too Pricey To Invest In Now?

Bitcoin is a cryptocurrency, a virtual or digital currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. It has the potential to revolutionise everything from global payments to asset prices, and it has seen a mind-bending price rise since its inception in 2009. But is it too expensive to invest in?

Bitcoin is divisible, so you can buy fractions of a bitcoin, and there are many ways to invest in it. However, it is a very risky asset type. It is extremely volatile, and even the most solid Bitcoin investment should be treated as a high-risk investment. For example, in the past, Bitcoin’s price fell over 80% in the course of several months.

So, is it too expensive? Well, that depends on your risk appetite. If you can potentially turn $2,400 into $50,000 (a 1,983% gain) in 10 years, would that be something you’d want to invest in?

Bitcoin's price volatility

Bitcoin is considered volatile. Its value has ranged from $25,000 to $70,000 in just one year. In the past, its price has fallen over 80% in several months, and this has happened multiple times. Bitcoin's volatility is measured by how much its price fluctuates relative to the average price over a period of time.

Volatility is a measure of how much the price of a financial asset varies over time. Volatility means that an asset is risky to hold as its value may substantially increase or decrease over any given period. The more volatile an asset, the more people will want to limit their exposure to it, either by not holding it or by hedging. Volatility also increases the cost of hedging, a major contributor to the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

Bitcoin's volatility is influenced by speculation and bets from crypto investors. Crypto investors gamble on Bitcoin's price going up or down to make a profit. This causes a sudden increase or decrease in Bitcoin's price, leading to volatility.

Bitcoin's volatility can be compared to that of gold and other currencies. Gold's volatility averages around 1.2%, while other major currencies average between 0.5% and 1.0%.

High energy consumption for mining

Bitcoin mining is an energy-intensive process that has raised concerns about sustainability and environmental impact. The energy consumption of the Bitcoin network has grown to massive proportions, surpassing the energy use of several countries. The process involves solving complex computational puzzles, requiring significant computational power and electricity.

The energy consumption of Bitcoin mining has doubled in 2023, coinciding with a rise in cryptocurrency prices. This trend is expected to continue as the value of Bitcoin increases. As of 2023, the global energy consumption from Bitcoin mining reached 141.2 TWh, with the US being one of the largest Bitcoin miners worldwide. Bitcoin mining in the US alone accounts for 0.6% to 2.3% of the nation's total electricity demand, comparable to the electricity consumption of the entire state of Utah.

The high energy consumption of Bitcoin mining has led to concerns about carbon emissions and the use of fossil fuels. The industry's carbon footprint is estimated at 78.7 million metric tons of CO2 annually, equivalent to the emissions of Oman. Moreover, the energy used for mining is primarily sourced from fossil fuels, with miners in the US relying on coal- or gas-based electricity. This heavy reliance on fossil fuels has significant environmental implications, contributing to climate change and carbon emissions.

In addition to the direct energy consumption of mining rigs, there is also a significant amount of energy required to cool the powerful computers and datacenters used in the mining process. This cooling requirement further increases the energy usage and environmental impact of Bitcoin mining.

The energy-intensive nature of Bitcoin mining has sparked debates and regulatory discussions. For instance, New York imposed a two-year moratorium on Bitcoin mining due to concerns about the industry's impact on renewable energy resources. On the other hand, industry lobbyists argue that Bitcoin mining can help stabilize the electric grid and promote advancements in energy security and sustainability.

Use in criminal activities

Bitcoin and other cryptocurrencies have been used in criminal activities, including money laundering, financial sanctions evasion, bribery, embezzlement, theft, and fraud. The inherent pseudonymity and decentralised nature of cryptocurrencies make them attractive to organised crime groups for conducting illicit activities. Criminals can use cryptocurrencies to move large sums of money, potentially reducing the risk of detection by law enforcement or traditional financial institutions.

The use of cryptocurrencies in criminal activities is increasing, but it still represents only a limited share of the criminal economy compared to cash. Cryptocurrency transactions related to criminal activities accounted for 0.34% of all crypto transaction volume in 2023, down from 0.42% in 2022. This decline is partly due to the increasing use of stablecoins, which now account for the majority of all illicit transaction volume.

The development sector and international development agencies can play a role in mitigating the criminal use of cryptocurrencies. This includes coordinating the development and implementation of regulatory and legislative frameworks, educating the public about the risks of cryptocurrency use, and strengthening law enforcement agencies' capacity to dismantle criminal networks.

Some specific examples of criminal activities involving cryptocurrencies include:

• Romance scams, where scammers target individuals and build relationships with them to pitch fraudulent investing opportunities.
• Hacking and theft of cryptocurrencies from exchanges and wallets, with losses totalling billions of dollars.
• Exit scams and Ponzi schemes through initial coin offerings (ICOs), where investments are attracted from retail investors, the price is inflated, and the perpetrators abandon the project after selling their shares.
• Money laundering using ICOs, where criminals buy tokens from legitimate investors and then sell them to launder illicit funds.
• Cryptojacking, which is the act of exploiting a computer to mine cryptocurrencies without the user's knowledge or consent.
• Ransomware attacks, where hackers demand payment in cryptocurrency to decrypt files or restore access to systems.

Regulatory risks

Global Regulatory Landscape

The regulatory landscape for Bitcoin is mixed, with outright bans in some countries, partial regulations in others, and no regulation at all in others. For example, countries like Algeria, Bolivia, Ecuador, Nepal, Nigeria, and Turkey have imposed outright bans on cryptocurrencies, while Vietnam and Russia bar their use as a means of payment but allow their citizens to trade and invest in them. China has prohibited registered financial institutions from engaging in cryptocurrency transactions, and the US has various federal agencies defining and regulating cryptocurrencies in different ways.

Consumer Protection

Consumer protection rules are lagging, with only one-third of the countries studied having rules in place to safeguard consumers investing in cryptocurrencies. Theft, volatility, misinformation, and deceptive advertising are all risks faced by consumers in the crypto market. However, some countries are taking steps to address this, such as requiring advertisers to disclose the risks associated with crypto investing and imposing rules to prevent and penalize deceptive conduct and fraud.

Preventing Market Collapse

The collapse of FTX, one of the largest crypto platforms, highlighted the risks of crypto assets and the need for stronger financial regulation and supervision. Centralized exchanges like FTX play a critical role in the crypto ecosystem by reducing the barriers to entry for individuals, but they also pose risks that regulators must address. Many exchanges lack transparency about their operations, finances, or governance, and they may misuse customer funds due to a lack of regulations. Global coordination among policymakers is needed to bring crypto activity within the regulatory perimeter and prevent another FTX-style collapse.

Financial Stability Risks

Crypto assets are not yet considered a risk to the global financial system, but some emerging market and developing economies are already materially affected. Advanced economies are also susceptible to financial stability risks from crypto, as institutional investors have increased stablecoin holdings. Regulatory authorities must manage these risks while not stifling innovation in the crypto space.

Global Standards and Coordination

Robust, comprehensive, and globally consistent crypto regulation and supervision are needed to address the risks posed by crypto assets effectively. The cross-sector and cross-border nature of crypto limits the effectiveness of uncoordinated national approaches, and patchwork regulations present opportunities for regulatory arbitrage. Global standard-setting bodies like the International Monetary Fund and the Financial Stability Board must establish global standards and provide technical assistance to individual countries to address these challenges.

Market manipulation

• Pump and Dump: This involves a group of people working together to artificially inflate the value of Bitcoin. Insiders buy Bitcoin early and then sell it once there is enough attention from traders and investors. Social media communities have made this strategy more accessible in recent years.
• Whale Wall Spoofing: This strategy involves a "whale" (a large Bitcoin holder) placing large orders to create fake buy or sell walls in the order books. For example, a whale might set large sell orders to trick investors into panic selling, and then buy more Bitcoin at a discounted price once the selloff occurs.
• Wash Trading: This strategy involves rapidly buying and selling the same amount of Bitcoin to inflate trading volume and generate more commission and entice more users. Smaller, unregulated exchanges may perform wash trades to make the exchange appear more active and attractive to traders.
• Stop Hunting: This strategy involves driving a cryptocurrency's price to a level where many participants have set stop-loss orders. The manipulator executes multiple sell orders to drive the price down, triggering the stop-loss orders and creating an opportunity to buy the asset at a lower price.

To protect yourself from market manipulation when investing in Bitcoin, consider the following strategies:

• Diversify your portfolio: Don't put all your eggs in one basket. A diversified portfolio ensures that market manipulation can only affect a small percentage of your assets.
• Dollar-cost averaging (DCA): This strategy involves buying a fixed amount of Bitcoin at regular intervals (e.g., monthly, weekly, or daily) throughout the year. This helps to average out the price over time and reduce the impact of short-term price swings caused by manipulation.
• Do your research: Always do your due diligence before investing. Compare data across different sources and focus on historical price trends rather than recent movements, which may be manipulated.

Frequently asked questions