Bitcoin Investment: Worthy Or Risky?

Bitcoin is a cryptocurrency with no central bank or government control. It has grown exponentially over the last decade, and its value has increased by 100 million percent in the last ten years. However, it is a very volatile asset, and its regulatory outlook is unclear. So, is it a good idea to invest in Bitcoin?

Bitcoin's value is based on speculation and is highly volatile. It has seen massive sell-offs and price drops, but it has always managed to turn itself around. Its value is also affected by market chaos, inflation, and regulation on crypto mining. Additionally, there are concerns about its use in illegal activity, its energy usage, and its potential for fraud and cybercrime.

On the other hand, Bitcoin has a limited supply, making it scarce and valuable. It is also a decentralised form of money, which means its value is not affected by central bank policies.

Before investing in Bitcoin, it is important to understand the risks involved and do your research. It is also crucial to only invest what you can afford to lose, as the cryptocurrency market is highly unpredictable.

Bitcoin's price volatility

The volatility of Bitcoin is measured by how much its price fluctuates relative to the average price over a given period. Volatility is a measure of how much the price of an asset varies over time, and it indicates the level of risk associated with holding that asset. Bitcoin's volatility is influenced by speculation, with investors betting on its price going up or down, which can lead to sudden increases or decreases in its value.

The high volatility of Bitcoin also has implications for the cost of hedging. Hedging is a strategy used to protect against losses from unexpected price swings, and it is more expensive when volatility is high. Additionally, the cost of converting into and out of Bitcoin is higher when volatility is elevated.

While Bitcoin's volatility can be a cause for concern, some supporters argue that it is understandable given the early stage of its adoption. As of 2021, only 114 million out of nearly 8 billion people in the world had invested in Bitcoin. Advocates expect that as the market grows and matures, volatility will decrease. They believe that a larger and more diverse investor base will reduce the influence of large single holders, often referred to as "whales," on Bitcoin's price.

The pros and cons of its decentralised nature

Bitcoin's decentralised nature has its benefits and drawbacks. On the one hand, it offers freedom from the control of a central authority, such as a bank or government, and it enhances security and data accuracy. On the other hand, it can be more costly and susceptible to criminal activity.

The pros of decentralisation

Bitcoin's decentralised nature means that it operates without a central authority to monitor, verify, and record transactions. This liberates users from the fear of a single entity absconding with their assets or the threat of external disruption. It also minimises the trust participants need to place in each other, as all participants of the peer-to-peer network view and verify transactions.

Decentralised networks also have fewer vulnerability points, as they don't rely on single points of control, and they optimise the distribution of resources, ensuring better performance, consistency, and less risk of complete failure.

The cons of decentralisation

Decentralised networks can be more costly to establish and maintain, as they require sophisticated infrastructure and technologies to enable communication and coordination across the network.

Additionally, the relative anonymity in decentralised networks could potentially enable bad actors to exploit the system for criminal activities.

Furthermore, decentralised networks rely on users to operate the network properly. If users do not maintain the network adequately, it can lead to conflicts and problems.

Finally, cryptocurrencies based on decentralised blockchain networks tend to experience significant price volatility, mainly due to the newness of the technology and high investor interest.

Its use in illegal activity

Bitcoin is a risky investment with high volatility, and its decentralised nature means that it is a favourite among criminals.

In 2018, researchers from the University of Sydney and the University of Technology Sydney found that 44% of bitcoin transactions and 25% of all users were associated with illegal activity. This included hacks, money laundering, and the trading of drugs and illegal pornography. The researchers also estimated that around 24 million bitcoin market participants use the cryptocurrency "primarily for illegal purposes", conducting around 36 million transactions per year, with a total value of around $72 billion.

The anonymity of Bitcoin is a major factor in its popularity with criminals. However, it is not completely anonymous, as every transaction is recorded on a public ledger called the blockchain, which can be used to identify specific individuals.

The use of Bitcoin in illegal activity has raised concerns about the lack of regulation in the cryptocurrency market and the potential for it to be used to fund terrorism, launder money, and avoid capital controls. There have been calls for more regulation to prevent criminals from using Bitcoin, but others argue that this would go against the idea of decentralisation that Bitcoin is based on.

Despite the concerns about its use in illegal activity, Bitcoin has continued to grow in popularity and is now a widely accepted form of payment and investment. However, it is important for investors to be aware of the risks associated with Bitcoin, including the potential for financial loss, fraud, and cybercrime.

The environmental impact of mining

Bitcoin mining is a highly electricity-intensive process that has a significant environmental impact. It is dependent on fossil fuels, with coal accounting for 45% of Bitcoin's energy supply mix, followed by natural gas (21%). This reliance on fossil fuels results in substantial carbon emissions, with Bitcoin mining producing an estimated 85.89 Mt of CO2 during the 2020-2021 period. The process also generates significant electronic waste, as the specialised computer hardware used for mining has a short lifespan, leading to disposal and replacement issues.

The energy-intensive nature of Bitcoin mining has drawn criticism from sustainability advocates, government officials, and business leaders. The industry's large energy requirements, greenhouse gas emissions, and significant hardware needs have been faulted as being antithetical to climate progress. The environmental impact of Bitcoin mining is further exacerbated by its water and land footprint. According to a study by United Nations scientists, the global Bitcoin mining network consumed 173.42 Terawatt hours of electricity during the 2020-2021 period. This energy consumption would rank Bitcoin as the 27th highest-consuming country in the world, ahead of nations like Pakistan.

The water footprint of Bitcoin mining during this period was estimated to be similar to the amount of water required to fill over 660,000 Olympic-sized swimming pools, enough to meet the domestic water needs of more than 300 million people in rural sub-Saharan Africa. The land footprint of Bitcoin mining activities was 1.4 times the area of Los Angeles.

To offset the carbon emissions produced by Bitcoin mining, billions of trees would need to be planted, covering an area almost equal to the Netherlands, Switzerland, or Denmark, or 7% of the Amazon rainforest.

Some researchers have compared the environmental impact of Bitcoin mining to other industries with significant negative climate impacts, such as beef and crude oil production. The energy-intensive nature of Bitcoin mining and its reliance on fossil fuels make it a significant contributor to global warming and climate change.

While some argue that Bitcoin mining could support renewable energy development by utilising surplus electricity from wind and solar sources, the reality is that the industry's current energy mix is heavily dependent on non-renewable sources.

Overall, the environmental impact of Bitcoin mining is significant and has drawn the attention of regulators and policymakers. Urgent regulatory intervention and technological advancements are needed to mitigate the negative consequences of Bitcoin mining on the environment.

Its value as a medium of exchange

Bitcoin is a decentralised, censorship-resistant digital currency that is based on blockchain technology. It is a monetary network, similar to a decentralised central bank, and it is not tied to the value of a basket of goods or services.

Bitcoin has been described as an "excellent store of value", but it has not yet achieved the liquidity required to be a medium of exchange or to be used as a unit of account. This is because it is still in the early stages of adoption, and it is not as widely accepted as traditional currencies. For example, it takes an average of 10 minutes to process a single bitcoin transaction, whereas credit card transactions are almost instantaneous.

However, Bitcoin already operates as a medium of exchange across the world, particularly in harsh legal environments where authoritarian governments use the financial system to oppress their citizens. In these cases, Bitcoin's inherent confiscation-resistance makes it most useful. Protestors in Hong Kong, Belarus, and Nigeria have all used Bitcoin to protect themselves and their privacy after local governments froze bank accounts and seized donations to their causes.

Bitcoin's adoption should not be measured by its use for commercial payments. Instead, the number of users, the demand to send Bitcoin transactions, and the Bitcoin price are better metrics. Several factors explain why Bitcoin’s success is not predicated on its use as a method of payment for daily transactions. Firstly, Bitcoin is barely a decade old. Secondly, the network effects of money are stronger than any other good or network. Monetary networks are mutually exclusive, meaning that a given amount of value cannot be invested in two different monetary networks at the same time. This forces individuals to choose their monetary network carefully, as the stakes for choosing the wrong network are high.

According to Gresham's Law, "bad money drives out good". In other words, individuals will spend money that is constantly being inflated and devalued and hold onto money that retains its value. Therefore, there should be very little demand to spend bitcoin on day-to-day purchases, while there is a strong demand to accumulate and hold bitcoin for the long term.

Bitcoin will only be used as a medium of exchange when inferior monies are refused by merchants. This may take a long time, as governments typically make it illegal to refuse the local currency. In the meantime, Bitcoin will continue to gain adoption in other realms.

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