Botcoin Investment: Worthwhile Or Risky Venture?

Bitcoin is a cryptocurrency with a market capitalization of $1.04 trillion as of August 5, 2024. It has experienced a tumultuous period, with a 15.14% decrease in value in the last 24 hours, and a 25.84% decrease over the past seven days. Despite this, Bitcoin has a history of resilience, and its value has soared to impressive heights, surpassing $70,000 in March 2024. With its growing popularity, the question arises: is Bitcoin a good investment? This paragraph will explore the advantages and disadvantages of investing in Bitcoin, considering its volatility, regulatory risks, and potential for growth.

Bitcoin's value and demand

Bitcoin's value is influenced by its supply and demand. Unlike fiat currencies, Bitcoin's value is not defined by a central entity like a bank. Instead, its price is influenced by how much people are willing to pay for it. When there is more demand for Bitcoin, the price goes up, and when there is less demand, the price goes down.

Bitcoin has a limited supply of 21 million coins, which will all be mined by 2140. Its supply is reduced by a process called "halving", which occurs approximately every four years, where the number of coins given as a reward for mining a block is cut in half. The last halving was on 19 April 2024, which brought the block reward to 3.125 bitcoins. This decreasing supply increases demand and thus value.

Demand for Bitcoin has been fuelled by media coverage, investing "experts", and business owners touting its value. It has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, it is popular for transferring large sums of money for illicit activities.

Bitcoin's value is also influenced by its ability to function as a store of value and a unit of exchange. It demonstrates six key attributes that enable its use in an economy: scarcity, divisibility, acceptability, portability, durability, and uniformity.

Bitcoin's value is also influenced by its decentralised nature, which makes it immune to government interventions and gives it a reputation for its cross-border capabilities. However, this also means it is very responsive to regulatory developments, and its price can be influenced by social media postings from celebrities.

Bitcoin's volatility

Bitcoin is considered a volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The volatility of Bitcoin is measured by how much its price fluctuates relative to the average price in a given period.

The volatility of Bitcoin is influenced by speculation and bets from crypto investors on its price increasing or decreasing. This causes a sudden increase or decrease in Bitcoin's price, leading to volatility. The more volatile an asset, the riskier it is to hold—its value may substantially increase or decrease on any given day.

Historically, low volatility in Bitcoin has preceded large price increases. This may be due to basic market psychology and patterns, such as seller energy, which is calculated by taking the percentage of addresses in profit and dividing it by one-year realized volatility. When seller energy is above its 95th percentile, it has signalled a potential upward move in Bitcoin's price.

While Bitcoin is a volatile asset, its volatility is showing a clear downward trend over time as it continues to mature.

Bitcoin's efficiency as a payment method

Bitcoin is a peer-to-peer payment method that does not require the involvement of third parties such as banks or other financial institutions. This makes it a cost-effective way to transfer funds, as it eliminates the need for intermediaries and their associated fees.

Bitcoin transactions are also highly secure due to the underlying blockchain technology. Blockchain creates a public ledger of transactions that is stored across a network of computers, making it virtually impossible to tamper with. Each transaction is given a unique identifier, and once it is added to the blockchain, it cannot be removed or altered. This makes Bitcoin a reliable and secure way to send and receive payments.

Additionally, Bitcoin has gained widespread acceptance as a payment method, with a growing number of online retailers, brick-and-mortar stores, and service providers accepting it. This increasing acceptance further enhances the efficiency of Bitcoin as a payment method, as it can be used for a variety of purchases and transactions.

The process of sending and receiving Bitcoin is also relatively simple and similar to using an app for sending or receiving money from a bank account. Users need to acquire Bitcoin through a cryptocurrency exchange or other means, set up a Bitcoin wallet, and then use the wallet to send or receive payments.

However, it is important to note that Bitcoin transactions are irreversible, and there may be transaction fees involved, which can be higher compared to traditional payment methods.

Bitcoin's energy consumption

The primary concern with Bitcoin's energy consumption is not just the massive amount of energy it uses but also the fact that most mining facilities in its network are powered by fossil fuels. This contributes to the already high carbon intensity of the electricity used for Bitcoin mining. According to an article in the scientific journal Joule, the average carbon intensity of electricity consumed by the Bitcoin network may have increased from 478.27 gCO2/kWh in 2020 to 557.76 gCO2/kWh in August 2021.

The energy-intensive nature of Bitcoin mining stems from its proof-of-work algorithm. This algorithm requires miners to perform numerous computational tasks, such as solving complex cryptographic puzzles, to validate transactions and add new blocks to the blockchain. The computational power of a network mining cryptocurrency is known as the hash rate, which represents the number of attempts to solve the cryptographic puzzle per second.

The continuous block mining cycle incentivizes people worldwide to mine Bitcoin, as it can provide a solid revenue stream. As a result, the total energy consumption of the Bitcoin network has grown exponentially over the years, leading to concerns about its environmental impact.

To put Bitcoin's energy consumption into perspective, a single Bitcoin transaction is estimated to have a similar carbon footprint to 477,359 VISA transactions or 35,897 hours of watching YouTube. Additionally, the underlying blockchain technology has limited transaction processing capacity, resulting in extremely high energy consumption per transaction.

While some argue that Bitcoin is more like "digital gold" due to its limited scalability, others compare its energy consumption to gold mining. The carbon footprint of mining a single Bitcoin is higher than that of mining gold worth the same amount.

To mitigate the environmental impact of Bitcoin, there have been calls for a switch to a less energy-intensive consensus mechanism, such as proof-of-stake. Ethereum, another cryptocurrency, has already moved to a proof-of-stake mechanism, reducing its electrical usage by over 99.9%.

Bitcoin's association with criminal activity

Bitcoins Association with Criminal Activity

Bitcoin and other cryptocurrencies have been associated with criminal activity, but this is largely a misconception. While it is true that Bitcoin can be used for illicit activities, the extent of this is often exaggerated.

In 2019, United States Treasury Secretary Steven Mnuchin stated that Bitcoin was a national security issue due to its use for illicit activities, and he claimed that cryptocurrencies were dominated by illegal activities and speculation. However, the data suggests otherwise.

According to Chainalysis' 2021 report, in 2020, the criminal share of all cryptocurrency activity was just 0.34% (approximately $10 billion in transaction volume). This is a decrease from 2019, when criminal activity represented 2.1% of all cryptocurrency transaction volume (approximately $21.4 billion worth of transfers). To put this into perspective, the UN estimates that between 2% and 5% of global GDP ($1.6 to $4 trillion) is connected with money laundering and illicit activity annually. This indicates that criminal activity using cryptocurrency transactions is much smaller than that of traditional fiat currencies, and it is decreasing year by year.

Furthermore, the transparent nature of blockchain technology and the active involvement of crypto exchanges help law enforcement agencies combat criminal activity. Blockchain is a publicly accessible ledger that records all transactions, allowing anyone to view the entire codebase at any time. This transparency makes it difficult for criminals to use cryptocurrencies without being noticed, as it leaves a clear trail of evidence that prosecutors can use to secure convictions.

Crypto exchanges, such as Binance, also actively assist law enforcement agencies in investigating and combating criminal activity. For example, in 2022, the Binance Investigations team responded to over 47,000 law enforcement requests, with an average response time of three days, which is significantly faster than traditional financial institutions.

While it is true that cryptocurrencies can be exploited by organised crime groups (OCGs) for money laundering and other crimes, the risks associated with their use, such as volatile value fluctuations, also contribute to the reluctance of criminals to use them for long-term investments. Additionally, the Know-Your-Customer (KYC) policies implemented by most crypto exchanges prevent complete anonymity, making it easier for law enforcement to track and identify criminal activity.

Frequently asked questions