Bitcoin: Worth The Investment Risk?

Bitcoin is a cryptocurrency with a current market capitalization of $1.13 trillion as of July 9, 2024. It has experienced a tumultuous journey, with a 65% decrease in market value over the past year, but it has also shown a remarkable recovery, reaching an all-time high of $73,750 on March 14, 2024.

Bitcoin's popularity is growing, but not everyone is convinced it's a good investment. Its high volatility, inefficiency in processing transactions, environmental impact, association with criminal activities, and lack of backing by any meaningful value are some of the concerns raised by critics.

On the other hand, supporters argue that it's too early to make definitive claims, and innovations are already addressing many of these issues. Bitcoin's decentralized nature, limited supply, increasing demand, and growing adoption by businesses and consumers contribute to its value.

Before investing in Bitcoin, it's essential to understand the risks and conduct thorough research, as it is a highly volatile and unregulated asset.

Bitcoin's value and demand

Bitcoins Value and Demand

Bitcoin has value because it can be exchanged for and used in place of fiat currency. Its high exchange rate is due to its demand by investors interested in the possibility of returns. However, its value is also influenced by many other factors.

Scarcity, Divisibility, Acceptability, Portability, Durability, and Uniformity

Bitcoin demonstrates the attributes of a currency, but its primary source of value lies in its restricted supply and increasing demand. Bitcoin's value is also influenced by its divisibility, acceptability, portability, durability, and uniformity.

• Scarcity: As the supply of unrewarded coins diminishes, demand increases. There will only ever be 21 million bitcoins in existence.
• Divisibility: Bitcoin is much more divisible than fiat currencies. One bitcoin can be divided into up to eight decimal places, with units called satoshis.
• Acceptability: More people are becoming familiar with cryptocurrencies, and citizens of many countries are adopting them due to failing financial systems. Businesses are also accepting them in greater numbers, and more consumers are using them.
• Portability: Bitcoin can be used across borders, allowing any consumer with an internet connection to participate in the global economy and access financial services.
• Durability: As it occupies a digital space, a bitcoin can last as long as there is a digital area for it to be stored in.
• Uniformity: Bitcoins cannot be counterfeited and don't have a physical appearance.

Greed and Fear of Missing Out

Two of the most influential factors behind Bitcoin's price volatility are greed and the fear of missing out on large returns. Greed is generally considered a negative trait, but in these modern times, it is natural for people to want more money. In fact, society and businesses even encourage the desire for more.

Investors and Traders

Because it is in demand by investors (or speculators, as they are hoping for returns), Bitcoin commands a very high price. Its exchange rate, the value most often associated with the coin, is influenced by investors buying the cryptocurrency and traders buying and selling to make money on price movements.

A Replacement for Traditional Money Systems

Bitcoin's original design was to be a replacement for traditional money systems and take control of money away from centralized governments and third parties. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value, and another way for investors to speculate, regardless of its monetary value.

Bitcoin's volatility

Bitcoin is considered a volatile asset. Its value is measured by how much its price fluctuates relative to the average price over a given period. Daily fluctuations of 5% are not unusual, and double-digit price moves also occur. On 19 May 2021, its price fell by nearly 30%, and it saw a 60% drop from November 2021 to May 2022.

The cryptocurrency industry is based on speculation, with investors betting on Bitcoin's price going up or down to make a profit. This causes sudden price increases and decreases, leading to volatility. The more volatile an asset is, the riskier it is to hold. Volatility can also increase the cost of hedging, a major contributor to the price of merchant services.

Bitcoin's resilience in the face of market downturns suggests it has a stronger foundation for recovery. This may be due to its established position as a store of value and its widespread adoption by institutional and retail investors.

Bitcoin's practicality for payments

However, bitcoin advocates argue that bitcoin is already more efficient than credit cards. While credit card transactions are processed faster, they can take days to officially settle, whereas bitcoin transactions are finalized in an average of 10 minutes. Bitcoin supporters also highlight the use of third-party solutions, such as the Lightning Network, which can process bitcoin payments in milliseconds. They expect future innovations to further enhance the efficiency of bitcoin payments.

The practicality of bitcoin payments is also reflected in its growing acceptance among businesses. A growing list of online retailers and brick-and-mortar stores now accept cryptocurrency as a form of payment. These businesses often use cryptocurrency payment gateways, which provide fiat-to-crypto conversion at the time of the transaction, ensuring price stability. Notable companies that accept crypto include AT&T, Microsoft, and Overstock.com.

Furthermore, bitcoin offers several advantages for payments. It provides anonymity and pseudonymity, allowing users to conduct financial matters without scrutiny from authorities. The peer-to-peer nature of cryptocurrency reduces the need for third-party involvement and results in lower fees for all parties involved. Bitcoin also enables users to make or receive payments anywhere with an internet connection, making it accessible to those without quick access to traditional financial services.

However, there are also drawbacks to consider when using bitcoin for payments. Transaction fees for the cryptocurrency have been rising, and the volatility of bitcoin means that the value of a user's bitcoin can change significantly between the time of purchase and the time the transaction is approved. Additionally, the lack of regulation in the cryptocurrency space means that there may be limited recourse if users are scammed or if the exchange goes out of business.

Bitcoin's environmental impact

Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy to perform the work associated with crypto mining. In fact, according to the University of Cambridge, Bitcoin mining uses an estimated 140 Terawatt-hours of electricity annually, which is more energy than is used by some small countries. This energy consumption has a significant environmental impact, with Bitcoin mining producing over 77 kilotons of electronic waste annually and contributing to global carbon emissions.

The energy intensity of crypto mining is a feature, not a bug. Bitcoin mining is the automated process of validating Bitcoin transactions without the intervention of trusted third parties like banks. The transaction validation process is designed to use large amounts of energy, as it depends on the computational power of thousands of computers to maintain the security of cryptocurrency blockchains that use proof-of-work consensus.

The environmental impact of Bitcoin mining is further exacerbated by the use of fossil fuels as the predominant energy source in most countries where cryptocurrency is mined. While miners seek out the cheapest energy sources to remain profitable, this often results in the use of fossil fuels, which have a higher carbon footprint. As a result, Bitcoin mining contributes to global carbon emissions, with one estimate placing the annual carbon dioxide emissions from Bitcoin mining at 140 million metric tons, or about 0.3% of global annual greenhouse gas emissions.

To put this in perspective, the climate damages caused by Bitcoin mining are estimated to be similar to those of energy-intensive or heavily polluting commodities such as beef production, natural gas electricity generation, or gasoline consumption. Additionally, the energy consumption of Bitcoin mining is equivalent to the annual electricity usage of all conventional data centers in the world.

It is worth noting that not all cryptocurrencies use a system that depends on large amounts of energy to run. For example, Ethereum, Solana, and many others use a system that requires very little energy, and their environmental impact is much lower.

In conclusion, while Bitcoin and other proof-of-work cryptocurrencies offer many potential benefits, their environmental impact is a significant concern, especially at a time when the world is striving to reduce its carbon footprint.

Bitcoin's legality

The legality of Bitcoin varies from country to country. Here is a detailed overview of Bitcoin's legality around the world:

Countries Where Bitcoin Is Legal

Bitcoin is legal in most developed countries, including the US, the UK, Japan, and Canada. In these countries, Bitcoin is subject to varying degrees of regulation and taxation. For example, in the US, the Internal Revenue Service (IRS) categorises Bitcoin as property for taxation purposes. Similarly, in Canada, the Canadian Revenue Agency defines Bitcoin as a crypto-asset that is taxed based on the circumstances in which it was used.

In the European Union, Bitcoin is recognised as a crypto-asset, and while it is not illegal to use it, the Markets in Crypto-assets (MiCA) Regulation defines services and assets that fall under regulatory controls.

Other countries where Bitcoin is legal include Australia, Mexico, and El Salvador, the first country to recognise Bitcoin as legal tender.

Countries Where Bitcoin Is Illegal

Bitcoin is illegal in several countries, including China, Saudi Arabia, and India. In these countries, the use of Bitcoin is banned or restricted due to concerns about its volatility, decentralised nature, and potential for illicit use.

For example, in China, the use of Bitcoin was heavily restricted in 2019, with some exchanges being licensed to offer Bitcoin and ether trading. In India, banks were banned from dealing in Bitcoin, and the overall legal status of cryptocurrencies remains unclear.

Other countries where Bitcoin is generally banned or restricted include Morocco, Nigeria, and Bangladesh.

Countries With Mixed Stances

Some countries have a mixed stance on Bitcoin, with government officials or regulators expressing concerns while not outright banning its use. For example, in South Africa, the Reserve Bank has stated that virtual currencies have "no legal status or regulatory framework", while the South African Revenue Service classifies Bitcoin as an intangible asset.

Similarly, in Brazil, Bitcoin was previously discouraged due to operational risks, but as of December 2022, a licensing regime for virtual asset service providers has been established, legalising crypto as a payment method.

Other countries with mixed stances on Bitcoin include Jordan, Lebanon, and Russia.

Frequently asked questions