Cryptocurrency Investment: Wise Or Risky Move?

Cryptocurrency is a digital currency that uses cryptography to secure its transactions and control the creation of new units. Bitcoin, the first cryptocurrency, was introduced in 2009 and has since sparked a debate about its future and that of other cryptocurrencies as a wise investment. While some people argue that Bitcoin's decentralised nature and limited supply make it a good investment, others point out its high volatility and lack of government regulation as reasons for caution. So, is cryptocurrency a wise investment? The answer may depend on one's risk tolerance and investment goals.

Cryptocurrency's volatile nature

Cryptocurrency is a digital currency that uses cryptography for security and to control the creation of new units. Bitcoin, the first cryptocurrency, was introduced in 2009 and has since experienced significant fluctuations in value, surging from $266 per bitcoin in April 2013 to a 50% plunge shortly after, sparking debates about its future.

The volatile nature of cryptocurrency is a key concern for potential investors. Cryptocurrency values can fluctuate wildly, making it difficult to predict their long-term performance. For example, in a single month, the value of one bitcoin dropped from over $2,500 to under $2,000 before regaining all-time highs over $3,400. These drastic swings are uncommon in traditional currencies.

The unregulated nature of cryptocurrency contributes to its volatility. Unlike fiat currencies, which are backed by governments and central banks, cryptocurrencies like Bitcoin are decentralised and free from government interference. The value of a bitcoin is solely dependent on what investors are willing to pay for it at a given time. Without a central authority to stabilise its value, cryptocurrency is susceptible to extreme price swings driven by market sentiment and speculation.

Additionally, the limited supply of Bitcoin and other cryptocurrencies can also contribute to their volatile nature. Bitcoin, for instance, has a maximum limit of 21 million tokens, and as of 2024, about 19 million were in circulation. The finite supply can lead to increased volatility as investors rush to buy or sell, causing rapid price changes.

The lack of insurance or government backing further exacerbates the risk associated with cryptocurrency investments. If an investor's digital wallet is hacked or their computer crashes, they may lose their entire investment with no recourse for recovery. This adds to the overall volatile nature of cryptocurrency as investors must constantly navigate the risk of significant losses.

The risks of investing in Bitcoin

Bitcoin is a decentralised currency, meaning it has no physical presence and is not backed by a central authority. This has its pros and cons. On the one hand, it frees investors from being beholden to institutions; on the other, it could result in legal complications. Without a central authority, the value of Bitcoin is entirely dependent on what other owners and investors ascribe to it.

One of the biggest risks of investing in Bitcoin is its volatile and fluctuating market. The price is constantly changing, and there is no telling if you will get a return on your investment. To avoid massive losses, investors are advised to keep a vigilant eye on the market and make small investments.

Another risk is that Bitcoin is technology-based, which leaves it open to cyberattacks and hacking. Many reports suggest that buyers lose their investments on exchanges and mining losses. If you have a wallet and you forget or misplace your key, there may be no way to retrieve your coins.

Bitcoin is also vulnerable to fraud. As buyers and sellers look to trade Bitcoins online, some of these exchanges can be fake, duping unsuspecting investors out of their Bitcoins in fraudulent exchanges.

Additionally, Bitcoin is not widely accepted or recognised as a currency. Very few companies accept it as a legitimate form of currency or in exchange for their products and services.

Finally, because Bitcoin is not regulated by any government, it is not insured by government-backed insurance companies. So, if your Bitcoins are stolen or lost, they are gone for good.

The future of cryptocurrency

Firstly, the increasing popularity of cryptocurrency has led to greater scrutiny and potential regulation by governments and financial authorities. While some countries, like El Salvador and the Central African Republic, have embraced cryptocurrencies as legal tender, others, like China, have imposed strict bans. The regulatory landscape is complex and constantly evolving, with some arguing that a global framework for crypto regulation is needed to legitimize and stabilize the market. However, international unity on this issue seems unlikely in the short term due to varying views and approaches.

Secondly, the mass-market adoption of cryptocurrency payments and the emergence of exchange-traded funds (ETFs) based on Bitcoin and other digital currencies will shape the future of the crypto sector. Cryptocurrencies are already accepted by many retailers, and the development of ETFs will make it easier for people to invest in Bitcoin. Additionally, the growing list of businesses accepting cryptocurrencies will make the market feel safer and more stable, attracting more investors.

Thirdly, the entry of institutional money into the market could be a significant catalyst for change in the crypto space. This has already begun to shift the power structure away from the decentralized nature that initially characterized cryptocurrency, and it remains to be seen how this will impact the market in the long term.

Lastly, the environmental impact of cryptocurrency mining has come under scrutiny. Bitcoin mining, in particular, is an energy-intensive process that consumes more electricity than many countries. While proponents suggest that renewable energy can be used to mitigate this issue, it remains a concern for critics and a potential area for future regulation.

In conclusion, the future of cryptocurrency is highly speculative, with the potential for both explosive growth and sharp corrections. The market will be influenced by regulatory developments, mass-market adoption, institutional investment, and environmental considerations. While the direction of these trends is uncertain, they will undoubtedly play a pivotal role in shaping the future of cryptocurrency.

The pros and cons of decentralisation

Decentralisation is a key concept in the digital age, offering a range of benefits for various industries. It allows for a more democratic and transparent approach to decision-making and resource allocation. However, there are also drawbacks and challenges to this approach.

Pros

• Trustless environment: In a decentralised blockchain network, there is no need for trust between participants as everyone has access to the same copy of the distributed ledger, and the majority reject any unauthorised changes.
• Enhanced data accuracy: Decentralisation helps maintain the accuracy of data shared between parties.
• Reduced vulnerability points: This approach reduces vulnerabilities in systems that rely too much on single points of control, preventing issues like service disruptions, inefficiencies, or fraud.
• Efficient resource distribution: Decentralisation optimises the distribution of resources, ensuring better performance, consistency, and less risk of complete failure.
• Transparency: Decentralised blockchains are publicly accessible, with each participating node maintaining a copy of the data.
• Full control: Blockchain members or users have complete control over activities, with no central authority governing the data, control, and power.
• Immutability: Since every node in the network must validate any changes, it is almost impossible to change data in a decentralised blockchain.
• Security: These networks are more secure than centralised ones due to encryption and the cryptographic validation of data from previous blocks.
• Minimising human fallibility: Smart contracts eliminate human error and mismanagement, running autonomously according to their code.
• Speedy and constant accessibility: Decentralised finance (DeFi) provides instant, perpetual access to financial services.
• A resilient system: The decentralised nature of DeFi makes the system more resilient to global disruptions like the COVID-19 pandemic.
• Permissionless transactions: DeFi does not require permission to use, enabling open access and innovation.

Cons

• Cost: Decentralised networks can be more expensive to establish and maintain due to the need for sophisticated infrastructure and technologies.
• Conflict: These networks rely on users to operate the network properly, which can lead to conflicts and problems if not adequately maintained.
• Volatility: Cryptocurrencies based on decentralised blockchain networks tend to experience significant price volatility due to the newness of the technology and investor interest.
• Crime: The relative anonymity in decentralised networks could potentially enable bad actors to exploit the networks for criminal activities.
• Uncertainty: The evolving nature of blockchain infrastructure introduces instability and uncertainty into DeFi projects built on top of them.
• Scalability: DeFi projects face scalability issues with their host blockchains, leading to slow transaction confirmation times and high transaction costs during congestion.
• Smart contract vulnerabilities: Smart contract vulnerabilities are a perpetual threat that could allow malicious actors to siphon funds from DeFi protocols.
• Insufficient liquidity: Although the total value locked in DeFi has surpassed $14 billion, more capital and trade volume are needed for DeFi to reach a mainstream scale.
• Over-collateralisation: High collateralisation is necessary to minimise default risk, but it reduces the capital efficiency of DeFi lending markets.
• Limited interoperability: A lack of interoperability isolates DeFi protocols and applications on different blockchains.
• Inadequate insurance: The DeFi space lacks insurance protocols to protect users in the event of exploits, hacks, or other losses.
• Centralisation risks: Some DeFi protocols still have single points of failure, and more decentralisation is needed to minimise governance risks.
• User responsibility: DeFi shifts more responsibility onto users, and if funds are lost due to mistakes or scams, no central authority will reimburse them.

The environmental impact of cryptocurrency

Cryptocurrency has a large environmental impact. Some networks use as much energy as small countries to maintain a blockchain. There are also concerns about its water and waste footprints.

Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy—more than is used by some small countries—to perform the work associated with crypto mining. The largest country for Bitcoin mining is the United States, which accounts for more than one-third of Bitcoin mining activities.

Bitcoin mining produces thousands of tons of e-waste per year. The amount of energy consumed by cryptocurrency mining will likely vary over time, assuming that prices and user adoption continue to change. Cryptocurrency mining is a competitive process: as the value of the block reward increases, the incentives to start mining also increase. Higher cryptocurrency prices mean more energy consumed by crypto networks because more people join the mining networks, trying to profit from the increases.

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 way the transaction validation process is designed uses large amounts of energy—the network depends on the computational power of thousands of computers. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.

It's important to point out that not all cryptocurrencies use a system that depends on large amounts of energy to run. Ethereum, Solana, and many others use a system that requires very little energy—their environmental impact adds little to the impact already created by the global networking infrastructure and its daily use.

Calculating the carbon footprint of cryptocurrency is more complicated. Although fossil fuels are the predominant energy source in most countries where cryptocurrency is mined, miners must seek out the most inexpensive energy sources to remain profitable. Digiconomist estimates that the Bitcoin network is responsible for about 55 million tons of carbon dioxide per year—equal to the amount generated by Singapore.

Greed and a fear of missing out on the latest gold rush drive Bitcoin and similar cryptocurrencies to use so much energy—these blockchains automatically adjust the mining difficulty according to how powerful the networks are. In other words, the less computing power the network has, the lower the mining difficulty is and the less energy it uses per transaction.

As a result, three countries heavily dependent on fossil fuels (the United States, China, and Kazakhstan) are responsible for around 71% of the world's Bitcoin mining.

Cryptocurrency mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. This is especially true for Application-Specific Integrated Circuit (ASIC) miners, which are specialized machines designed for mining the most popular cryptocurrencies. According to Digiconomist, the Bitcoin network generated about 10.52 kilotons (annualized) as of August 2024.

Due to the heat generated by mining machines, miners, manufacturers, and maintainers have turned to water cooling to reduce the costs of keeping equipment cool. In some cases, large mining farms have discharged hot or warm water into lakes or other water bodies, raising concerns about raising the average temperature of or contaminating these bodies.

The results of these practices are unknown, as not enough research has yet been completed to learn how much water is consumed (made unusable) or contaminated.

Large-scale cryptocurrency miners are often located where energy is abundant, reliable, and cheap. But processing cryptocurrency transactions and minting new coins does not need to be energy-intensive. Bitcoin could be adjusted to use a non-competitive block proposing and verification mechanism.

The proof-of-stake (PoS) consensus mechanism is an alternative to cryptocurrency mining that does not use extensive computing power. The authority to validate transactions and operate the crypto network is instead granted based on the amount of cryptocurrency a validator has "staked" or put up as collateral for honest behavior and the privilege of earning fees.

Other methods of validation, such as proof of history, proof of elapsed time, proof of burn, and proof of capacity, are also being developed. While Ethereum's developers have the blockchain's old proof-of-work mechanism—with estimates of a 99.9% reduction in carbon emissions—there is no such objective in the Bitcoin community. Since Bitcoin is the most popular crypto, it means that mining, along with its enormous energy costs, is likely here to stay as long as it remains profitable.

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