The Power Of Investing Small In Bitcoin

Bitcoin has been one of the best investments in the world since its creation in 2009. While it has experienced extreme volatility, such as an 80% crash in 2017 and 2018, and a 60% sell-off in 2022, it has also seen massive gains. For example, if you had invested $1 daily in Bitcoin over 9 years, you would have received a return of upwards of $18 million. This is due to Bitcoin's massive potential and its entirely uncertain outlook. Its decentralised nature also helps secure the network and make it resistant to manipulation, tampering, and fraud. However, it is important to remember that Bitcoin is not a get-rich-quick scheme but rather a long-term investment.

Dollar-cost averaging strategy

Investing in Bitcoin can be a risky endeavour due to its volatile nature. However, there are ways to mitigate this risk, such as the Dollar-cost averaging (DCA) strategy.

Dollar-cost averaging is a simple investment strategy where an investor puts a set amount of money into an asset at regular intervals, rather than investing a lump sum all at once. This strategy is often used when an investor foresees the long-term growth of an asset but wants to remove short-term volatility. By purchasing small amounts of an asset, such as Bitcoin, at regular intervals, investors can minimise the impact of short-term price changes.

For example, an investor with $1,000 can commit to purchasing $50 worth of Bitcoin every month for 20 months, instead of a single $1,000 purchase. This strategy can be beneficial when investing in cryptocurrencies, which are known for their volatility and 24/7 trading. DCA can result in reduced losses during a market downturn and better gains as the market improves. Additionally, over a period of many years, DCA can provide better returns than a single investment. For instance, an investor who made $5 weekly investments in Bitcoin over the last four years would have made a 460% return using the DCA strategy, compared to a 243% return on a single investment.

The DCA strategy is also attractive due to its simplicity and ease of implementation. Investors can automate the process by using features like recurring buys on crypto exchange apps, freeing up time and removing the emotional aspects of trading.

Overall, the Dollar-cost averaging strategy is a useful tool for investors who are bullish on an asset's long-term potential but want to mitigate the risks associated with short-term volatility.

Bitcoin's fixed supply

Bitcoin has a fixed supply of 21 million. This is a defining feature of the cryptocurrency, designed to limit the supply and increase its scarcity over time, which tends to increase demand and price.

The Bitcoin generation algorithm defines how the currency is created and at what rate. This is done by a process called block creation or mining. Each time a new block is discovered by a user, a set number of Bitcoins are created. The rate of block creation is adjusted every 2016 blocks, aiming for a constant two-week adjustment period (equivalent to 6 per hour).

The number of Bitcoins generated per block is set to decrease by 50% every 210,000 blocks, or about once every four years. This is known as the block reward halving. The result is that the number of Bitcoins in existence will not exceed slightly less than 21 million. As of December 18, 2023, there were 19.57 million bitcoins in existence, leaving about 1.45 million bitcoins to be released.

The 21 million supply limit is thought to be based on the money supply replacement theory. The idea is that by limiting the maximum supply and slowing the rate at which new Bitcoins are created, each individual Bitcoin unit (known as a satoshi) will appreciate in value over time.

An alternative explanation for the 21 million limit is that it is based on mathematical extrapolations from Bitcoin's operating parameters. The Bitcoin core code adjusts the mining difficulty to ensure that each new block is mined every 10 minutes on average. Based on this feature, a total of 210,000 blocks should be mined in each four-year cycle, after which the block reward is halved. If you extrapolate this forward, you will find that the sum of the block rewards for each cycle equals 100, and by multiplying this by the 210,000 blocks/cycle figure, you arrive at the maximum possible supply of 21 million.

Volatility

The cryptocurrency industry is driven by speculation. Crypto investors bet 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. Volatility means that an asset is risky to hold as its value can substantially increase or decrease on any given day. The more volatile an asset, the more people will want to limit their exposure to it.

Bitcoin's volatility has been declining and is expected to continue doing so. In fact, Bitcoin is currently less volatile than 33 S&P 500 stocks, and as recently as October 2023, there were 92 S&P 500 stocks more volatile than Bitcoin. Bitcoin has also shown signs of maturation, with new all-time lows in volatility on a yearly scale.

Historically, low volatility has typically occurred at the end of long bear markets when all the selling has been exhausted and seller energy is low. This is when Bitcoin's price bottoms out and begins to increase.

Environmental concerns

Bitcoin's environmental impact is significant, with its large energy requirements and associated carbon emissions contributing to global warming. Bitcoin's decentralised network of "miners" simultaneously solve complex equations using significant computational power and energy. The energy intensity of Bitcoin mining is a feature, not a bug, as it maintains the security of the cryptocurrency blockchain.

Bitcoin mining requires vast amounts of energy—more than is used by some small countries. The Cambridge Bitcoin Electricity Consumption Index estimates that Bitcoin uses around 140 Terawatt-hours (TWh) of electricity annually (0.63% of global electricity production). This is more than the energy consumption of countries like Pakistan and Ukraine. Bitcoin's energy consumption has grown in recent years, with the price of Bitcoin reaching new highs, leading to more miners joining the network.

The type of energy used in Bitcoin mining is also important. Most mining facilities are located in regions that rely on highly polluting coal-based power or hydroelectricity, which are cheap and lightly taxed. China, in particular, has been a major hub for Bitcoin mining, with nearly three-quarters of all miners at its peak. However, a crackdown on crypto mining in China has led to a shift in the geography of mining, with miners now seeking out the cheapest sources of energy, which are often renewable.

The environmental impact of Bitcoin goes beyond energy consumption. Bitcoin mining also generates significant electronic waste, as the specialised hardware becomes obsolete roughly every 1.5 years. According to Digiconomist, the Bitcoin network generates approximately 72,500 tons of electronic waste annually.

Additionally, the heat generated by mining machines has led to water cooling, raising concerns about the contamination and temperature increase of bodies of water.

The proof-of-stake (PoS) consensus mechanism is an alternative to Bitcoin mining that does not require extensive computing power and energy. Other cryptocurrencies, such as Ethereum, Solana, and Dash, use this mechanism, reducing their environmental impact.

While Bitcoin's environmental impact is substantial, it is important to note that the current banking system and fiat currency also have significant environmental costs associated with their maintenance and creation.

Regulatory concerns

The regulatory treatment of Bitcoin also differs within the same country. In the United States, for instance, the Internal Revenue Service (IRS) treats cryptocurrency as property, while the Commodity Futures Trading Commission (CFTC) considers it a commodity. This discrepancy in classification leads to confusion and makes it challenging to establish clear regulatory guidelines.

The lack of consistent regulation across different countries and even within the same country creates uncertainty and potential risks for investors. Regulatory changes can significantly impact the price of Bitcoin, as seen in the case of China's crackdown on cryptocurrency businesses in 2019, which caused a drop in Bitcoin's value. On the other hand, regulatory "victories" can lead to temporary price surges.

The unique characteristics of cryptocurrencies, such as their global portability and the absence of borders, present a challenge for regulators. The distributed ledger technology that Bitcoin is built on allows users to transact directly with their peers without being monitored or controlled by a central authority. This "trustless" nature of Bitcoin, where users do not need to trust a third party, is a key aspect of its appeal but also raises regulatory concerns.

Regulators are concerned about the potential for illicit and illegal activities enabled by Bitcoin, such as money laundering, financing terrorism, and buying or selling banned substances. The anonymous nature of Bitcoin transactions makes tracing and monitoring these activities more difficult for law enforcement agencies.

To address these regulatory concerns, there have been calls for enhanced cryptocurrency regulation and international cooperation among regulators. The International Monetary Fund (IMF) has advocated for international discussions and collaboration to establish consistent guidelines for cryptocurrencies. Some countries, like Japan, have taken proactive steps by officially recognizing cryptocurrencies as property and developing regulatory frameworks.

In conclusion, regulatory concerns are a significant factor to consider when investing in Bitcoin. The lack of consistent regulation globally and the potential for regulatory changes to impact Bitcoin's value create an uncertain environment for investors. While Bitcoin's decentralized nature is a key advantage, it also raises challenges for regulators, particularly in addressing illegal activities and protecting investors. As the regulatory landscape evolves, investors must stay informed and consider the potential risks associated with regulatory changes.

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