Bitcoin Investment: Good Idea Or Risky Business?

Bitcoin is a cryptocurrency created in 2009 by the mysterious Satoshi Nakamoto. It is built on blockchain technology, which uses a combination of private keys, public keys, and network consensus for validation and security. Bitcoin's value has seen wide swings, increasing from about $26,000 in September 2023 to around $73,000 in March 2024. Its volatile nature makes it a risky investment, and investors need to understand both Bitcoin and the wider crypto market before deciding.

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's volatility can be intimidating, it can also present opportunities for investors. Historically, periods of low volatility in Bitcoin have been followed by steep rises in price.

Bitcoin's use for payments

Bitcoin can be used to make payments for goods and services, and there are a growing number of merchants and services accepting Bitcoin worldwide. Using Bitcoin to transact is easy and accessible to everyone.

There are several ways to pay with Bitcoin. For example, you can install an app on your mobile device for everyday use or have a wallet only for online payments on your computer. Choosing a wallet is easy and can be done in minutes.

One of the benefits of paying with Bitcoin is that you don't need to give up as much personal information. You only need to provide your name and address if you're purchasing physical goods. If it's a digital item, your email will usually suffice, and if you're making a donation, you may not need to provide any information at all.

After providing the required information, the website will display the Bitcoin payment information, which will include a link to sign in to a Bitcoin payment processor like Coinbase. Most Bitcoin payment processors will also provide a QR code at the checkout, which represents a Bitcoin address and payment amount. You can scan this QR code to pre-fill the recipient's Bitcoin address and the requested payment amount. Once you send the transaction, the payment is complete.

If you can't scan QR codes or the merchant only provides a Bitcoin address, you can manually enter this information as the transaction recipient in your Bitcoin wallet software. To do this, you'll need to provide the recipient's Bitcoin address and the amount of Bitcoin to send. With the address and amount, simply enter them into the "send" form of your wallet and submit the transaction.

Bitcoin's environmental impact

Climate Impact

Bitcoin mining's energy consumption is vast, with a global network consumption of 173.42 Terawatt-hours of electricity during 2020-2021. This energy consumption is greater than that of some countries, with Bitcoin's energy use ranking 27th in the world if it were a country. The energy used for Bitcoin mining during this period resulted in a carbon footprint equivalent to burning 84 billion pounds of coal or operating 190 natural gas-fired power plants. To offset this carbon footprint, 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.

The energy used for Bitcoin mining is predominantly from fossil fuels, with coal accounting for 45% of its energy supply mix, followed by natural gas at 21%. Hydropower, a renewable energy source with significant water and environmental impacts, powers 16% of Bitcoin mining, while nuclear energy provides 9%. Solar and wind energy sources only contribute 2% and 5% respectively.

The high energy consumption and resulting carbon emissions of Bitcoin mining have led to concerns from environmental activists, governments, and business leaders. The greenhouse gas emissions from Bitcoin mining could potentially push global warming beyond the Paris Agreement's goal of holding anthropogenic climate warming below 2 degrees Celsius.

Water and Land Impact

Bitcoin mining also has significant water and land footprints. During 2020-2021, the water footprint of Bitcoin mining was similar to the amount of water required to fill over 660,000 Olympic-sized swimming pools, enough to meet the current domestic water needs of more than 300 million people in rural sub-Saharan Africa. The land footprint of Bitcoin mining activities during this period was 1.4 times the area of Los Angeles.

Mitigation Strategies

The environmental impact of Bitcoin mining has prompted calls for regulatory interventions and technological advancements to improve the efficiency of the global financial system and reduce its harm to the environment. Some experts suggest investing in other types of digital currencies that are more energy-efficient and environmentally friendly. Additionally, Bitcoin miners are exploring ways to utilize stranded energy sources, such as natural gas, wind, and solar power, to fuel their operations, which could potentially help reduce atmospheric methane emissions and contribute to the fight against climate change.

Bitcoin's association with criminal activity

Bitcoin is often associated with criminal activity, but this is largely a myth. While it is true that criminals can use Bitcoin to move large sums of money, potentially reducing the risk of detection by law enforcement, Bitcoin transactions are not completely anonymous. Most crypto exchanges have Know-Your-Customer (KYC) policies in place, and even without KYC scanning, law enforcement can track crypto transactions on the blockchain, which is transparent and immutable.

In 2019, United States Treasury Secretary Steven Mnuchin stated that Bitcoin was a national security issue because it had been used for illicit activities. However, the data suggests otherwise. In 2022, illicit crypto volumes reached an all-time high of $20.6 billion, but this represented only 0.24% of all crypto activity. This is a much smaller proportion than the estimated 2-5% of global GDP ($1.6 to $4 trillion) that is laundered through traditional financial systems in fiat currencies.

Crypto exchanges, such as Binance, are actively involved in helping law enforcement combat criminal activity. In 2022, Binance responded to over 47,000 law enforcement requests, with an average response time of three days, faster than any traditional financial institution. Binance has also assisted in critical operations that brought down criminal groups operating with millions of dollars. For example, in 2021, the Binance Investigations team played a vital role in an international investigation that dismantled a cybercriminal ring responsible for over $500 million in illicit activity.

While it is true that Bitcoin can be used for criminal activity, the association is often overstated. The transparency of blockchain technology and the active involvement of crypto exchanges actually help law enforcement agencies combat criminal activity.

Bitcoin's value

However, in the long term, Bitcoin has been the top-performing asset of any class, climbing a staggering 9,000,000% between 2010 and 2020. Its value has continued to increase since then, reaching an all-time high of around US$73,000 in mid-March 2024.

• Supply and demand: there will never be more than 21 million Bitcoins, and the rate at which they are released is reduced every four years.
• Production costs: while Bitcoin benefits from minimal production costs, the process of mining it requires immense processing power.
• Market share: Bitcoin's cryptocurrency market share has sharply declined over the years, falling from over 80% in 2017 to just over 56% today.
• Government legislation: a ban on Bitcoin in regions such as the EU or the US could be devastating for its overall value.
• Public interest and media coverage: Bitcoin is greatly influenced by the court of public opinion. For example, in 2021, a tweet from Elon Musk caused its price to drop by 30% in a single day.

Due to its volatility, investing in Bitcoin is risky, and it is generally recommended only if you have a high-risk tolerance and can afford to lose some or all of your investment. If you choose to invest, it's important to maintain a diversified portfolio that includes several different types of investments to reduce your overall risk exposure.

Frequently asked questions