Understanding Bitcoin: Owning Vs. Investing

Bitcoin is a cryptocurrency, a virtual currency designed to act as money and a form of payment outside the control of any one person, group, or entity. It is rewarded to blockchain miners who verify transactions and can be purchased on several exchanges. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto.

Investing in Bitcoin can be done in several ways, including through cryptocurrency exchanges, traditional stockbrokers, money transfer apps, Bitcoin ATMs, and Bitcoin exchange-traded funds. It is important to note that investing in Bitcoin carries risks, including volatility, fraud, and theft, and it is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.

On the other hand, owning Bitcoin means having direct control and possession of the cryptocurrency. This can be done by storing it in a digital wallet, either a hot wallet or a cold wallet. A hot wallet is typically provided by a trusted exchange or provider and accessed through an app or browser, while a cold wallet is a small, encrypted portable device that allows you to carry your Bitcoin.

Therefore, while investing in Bitcoin involves using third-party platforms or services to buy and sell the cryptocurrency, owning Bitcoin means having direct possession and control over it, usually through a digital wallet.

Bitcoin's volatility

Bitcoin is 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.

While Bitcoin is volatile, it is less volatile than many popular mega-cap stocks. In October 2023, Bitcoin's volatility was lower than that of 92 S&P 500 stocks. Additionally, Bitcoin's volatility has been declining and is projected to continue doing so.

Overall, Bitcoin's volatility is a critical factor to consider when investing in this asset class. While it can provide opportunities for substantial gains, it also carries the risk of significant losses.

Bitcoin's efficiency as a payment method

Obtaining Bitcoin

Before using Bitcoin as a payment method, one must first obtain it. This can be done through cryptocurrency exchanges, peer-to-peer platforms, Bitcoin ATMs, or mining. Cryptocurrency exchanges are the most popular method, with platforms like Coinbase, Binance, and Kraken providing user-friendly interfaces for purchasing Bitcoin.

Selecting a Bitcoin Wallet

A Bitcoin wallet is essential for securely storing, transmitting, and receiving Bitcoin. Various types of wallets include software, hardware, paper, and online wallets, each offering different levels of security and accessibility.

Paying with Bitcoin

Once Bitcoin is obtained and stored in a wallet, it can be used for online shopping, in-person payments, peer-to-peer transactions, and payment requests in the form of invoices. Many online shops and service providers accept Bitcoin, and some physical retailers and businesses also support it.

Confirming and Tracking Transactions

After initiating a Bitcoin payment, it is crucial to confirm its status. Bitcoin transactions are stored on a public database called the blockchain, which can be accessed via blockchain explorer websites or apps. Most merchants require multiple confirmations before deeming a payment successful.

Transaction Fees

Transaction fees are paid to miners who validate and include transactions in the blockchain. The fee amount depends on transaction size, network congestion, and urgency. Higher fees can be paid for priority processing, but this increases the overall cost.

Maintaining Information and Security

Staying up to date with Bitcoin advancements, legislation, and security best practices is vital. This includes safeguarding wallets and private keys, staying informed about market trends and potential hazards, understanding regulatory compliance, and backing up wallet recovery seeds or private keys regularly.

Benefits of Using Bitcoin as a Payment Method

The use of Bitcoin as a payment method offers several advantages, including simplicity and accessibility. It eliminates the need for lengthy approvals and cumbersome paperwork associated with traditional banking. Additionally, Bitcoin transactions generally have lower fees, especially for international dealings. Bitcoin also provides added security and transparency, as transactions are chronicled on the blockchain and linked to wallet addresses rather than personal information.

Future Prospects

Financial experts predict a bright future for Bitcoin as a payment method. Its value and acceptance continue to evolve, and its potential use as a mainstream payment option gains credibility. As cryptocurrencies gain popularity, Bitcoin's utility as a medium of trade becomes more apparent.

Bitcoin's environmental impact

Carbon Footprint

Bitcoin mining has a significant carbon footprint due to its heavy reliance on fossil fuels, particularly coal and natural gas. According to a United Nations University study, the global Bitcoin mining network consumed 173.42 Terawatt-hours of electricity from 2020 to 2021. This energy consumption level would rank 27th in the world if Bitcoin were a country, surpassing the energy usage of nations like Pakistan. The resulting carbon emissions were equivalent to burning 84 billion pounds of coal or operating 190 natural gas-fired power plants. To offset these emissions, 3.9 billion trees would need to be planted, covering an area almost equal to the Netherlands, Switzerland, or Denmark, or 7% of the Amazon rainforest.

Water Footprint

Bitcoin mining also has a substantial water footprint. During the 2020-2021 period, Bitcoin's water footprint was similar to the amount of water required to fill over 660,000 Olympic-sized swimming pools. This amount of water is enough to meet the current domestic water needs of more than 300 million people in rural sub-Saharan Africa.

Land Footprint

The land footprint of worldwide Bitcoin mining activities during the 2020-2021 period was 1.4 times the area of Los Angeles.

Energy Sources

The UN study also revealed that coal accounted for 45% of Bitcoin's energy supply mix, followed by natural gas (21%). Hydropower, a renewable source with significant water and environmental impacts, satisfied 16% of its electricity demand. Nuclear energy contributed 9%, while solar and wind energy provided only 2% and 5%, respectively.

Country-Level Impact

China was the largest contributor to Bitcoin mining, followed by the United States, Kazakhstan, Russia, Malaysia, Canada, Germany, Iran, Ireland, and Singapore. These top 10 Bitcoin mining countries were responsible for 92-94% of Bitcoin's global carbon, water, and land footprints.

E-Waste

Bitcoin mining also generates significant electronic waste (e-waste). The production and disposal of specialized hardware for Bitcoin mining contribute to this issue. It is estimated that Bitcoin's annual e-waste amounts to 30.7 metric kilotons, comparable to the amount of IT and telecommunication equipment waste produced by the Netherlands.

Comparison with Other Industries

Bitcoin's energy consumption and emissions are often compared to those of traditional industries. Bitcoin's annual energy consumption is estimated at 129.45 TWh, which accounts for only 0.078% of global energy use. In contrast, the gold industry consumes around 240.61 TWh annually, and the traditional banking system uses approximately 638.88 TWh. When considering emission intensity (g/kWh), Bitcoin is more environmentally efficient than the gold industry and has a higher sustainable energy mix.

Mitigation Strategies

Urgent regulatory interventions and technological advancements are needed to address the environmental impacts of Bitcoin and the broader digital currency sector. The UN scientists who conducted the study recommended investing in other types of digital currencies that are more energy-efficient and environmentally friendly. They also suggested exploring ways to utilize stranded energy, such as natural gas, wind, and solar power, to fuel Bitcoin mining operations, potentially reducing atmospheric methane emissions and contributing to the fight against climate change.

Bitcoin's association with criminal activity

Bitcoin and other cryptocurrencies have become increasingly popular tools for criminal and terrorist activities. In 2020, the global total of Bitcoin-related illicit activities amounted to $10 billion. While this number is large, it is important to note that the majority of Bitcoin is not used for criminal activity. In 2019, criminal activity represented 2.1% of all Bitcoin transaction volume, and in 2020, this number fell to just 0.34%. This is significantly lower than the estimated 2-5% of global GDP that is laundered through traditional methods.

There are several reasons why criminals and terrorists are drawn to using Bitcoin and other cryptocurrencies:

• The promise of anonymity: While all transactions on the blockchain are kept on the public record, the identities of those making the transactions remain unknown. This allows criminals to trade drugs, weapons, explosives, and other illegal goods and services without revealing their identity.
• No third-party involvement: Cryptocurrencies are transferred directly between peers, without the need for a mediator. This lack of intermediation makes it easier for criminals to sell drugs or digital data, such as child pornography, as well as fund terrorist activities across borders.
• Unmatched access and speed: Trading with cryptocurrency is easy and only requires an internet connection and a wallet application. Cryptocurrencies are always available, and there is no need to validate transactions with a central body or third party. Transactions are typically completed within minutes and cannot be reversed once confirmed.
• Easy storage and transfer: As digital assets, cryptocurrencies are easy to store and do not take up physical space. They can also be easily transferred locally and internationally, without the risk of being seized.

While Bitcoin and other cryptocurrencies have become popular tools for criminal activities, it is important to note that law enforcement agencies are increasingly focusing their resources on crypto criminal investigations. Advanced blockchain analytics solutions are being developed to help de-anonymize and reveal illicit transactions made by criminals, making it easier for authorities to investigate and prosecute these crimes.

Bitcoin's value and competitors

Bitcoins Value and Competitors

Bitcoin's value comes from its finite supply, its status as the first cryptocurrency, and its alternative appeal to fiat currencies. Bitcoin's value is also derived from its store of value and payment system.

Bitcoin's value is not influenced by international relations and politics to the same extent as gold, which is vulnerable to the foreign monetary policies of central banks. Bitcoin's decentralisation and independence from governments also make it a potential replacement for the US dollar as a global currency.

Bitcoin's competitors include other cryptocurrencies, such as Ethereum, Tether, XRP, Binance Coin, Cardano, Solana, Dogecoin, and Shiba Inu. These are known as altcoins and are derived in some form from Bitcoin. Altcoins have not been able to compete with Bitcoin due to its reliability and immutability.

Ethereum, the second-largest cryptocurrency by market capitalisation, is a blockchain platform that supports smart contracts and secure financial transactions. Its cryptocurrency, Ether, does not have a hard supply cap, and its supply is managed through a process called "burn".

Tether is a stablecoin, meaning its market value is pegged to a currency or external reference point to reduce volatility.

XRP is the native token for the XRP Ledger, created as a payment system by Ripple in 2012.

Binance Coin is a utility cryptocurrency that operates as a payment method for fees associated with trading on the Binance Exchange.

Cardano is a "proof-of-stake" cryptocurrency created by engineers, mathematicians, and cryptography experts.

Solana is a blockchain platform that supports decentralised applications and has faster transaction speeds and lower transaction fees than Ethereum.

Dogecoin, accepted as a form of payment by some major companies, was created as a joke by software engineers to comment on the wild speculation of the cryptocurrency market.

Shiba Inu is a "memecoin" inspired by Dogecoin, which briefly surpassed Dogecoin's market capitalisation in 2021.

Frequently asked questions