Bitcoin Investment: A Good Bet?

Bitcoin is a cryptocurrency, a virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. It was the first cryptocurrency, created in 2009 by the mysterious Satoshi Nakamoto. Bitcoin's value has fluctuated since its inception, with its highest value being nearly $73,700 in March 2024.

Bitcoin's value is influenced by supply and demand, media coverage, public interest, and the regulatory environment. It is prone to price volatility, with wide swings to the upside and downside.

Bitcoin is a speculative investment, and its high volatility makes it a risky target. It is not a productive asset and does not generate any income like interest, dividends, or earnings. Its value is based on supply and demand, and it is in demand by investors who hope for profits and traders who buy and sell it to make money on price movements.

Bitcoin has some prominent backers, including business analytics platform MicroStrategy, Marathon Digital Holdings, and Tesla. However, it also has its critics, including billionaire investor Warren Buffet, who called it rat poison.

Before investing in Bitcoin, it is essential to understand the risks involved, do your research, and consult with a financial advisor.

Bitcoin's price volatility

Bitcoins Price Volatility

Bitcoin is prone to price volatility, with wide swings to the upside and downside. The most recent upswing comes alongside growing institutional demand for the cryptocurrency as an attractive asset class. Bitcoin's value has rallied over the last few quarters, increasing from about $26,000 in mid-September 2023 to an all-time high of around $73,000 in mid-March 2024. However, in January 2024, prices sank to $39,000 despite the launch of the first US spot Bitcoin exchange-traded funds (ETFs).

Bitcoin's cryptocurrency market share has sharply declined over the years. In 2017, it maintained a market share of over 80%. Bitcoin's current market share is just over 52%. Despite that fall, Bitcoin remains the dominant force in the cryptocurrency market and is the marker by which many other cryptocurrencies determine their value.

Bitcoin is considered fairly volatile. The volatility of Bitcoin is measured by how much Bitcoin's price fluctuates relative to the average price in a period of time. Daily fluctuations of 5% are ordinary, not to mention occasional double-digit price moves. On May 19, 2021, its price plunged nearly 30%. It fell over 60% from November 2021 to May 2022. While it has typically rallied after these drops, critics argue the big fluctuations mean it doesn't work.

Bitcoin advocates say the volatility is understandable because Bitcoin is still in the early stages of adoption. As of 2021, only 114 million of the world's nearly 8 billion people invested in Bitcoin, according to data from crypto.com. Advocates expect volatility to decrease as the market grows and mature securities like Bitcoin ETFs are likely to become available.

The cryptocurrency industry thrives on speculation. Crypto investors make bets that Bitcoin's price will go up or down to make profits. This causes a sudden increase or decrease in Bitcoin's price, which leads to volatility.

Volatility means that an asset is risky to hold—its value may go up or down substantially on any given day. The more volatile an asset, the more people will want to limit their exposure to it, either by not holding it or by hedging. Volatility also increases the cost of hedging, which is a major contributor to the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will decrease as well.

There are several factors that influence the volatility of Bitcoin's price. Firstly, supply and demand. It is widely known that no more than 21 million Bitcoins can be produced, and that is unlikely to happen before 2140. Only a certain number of Bitcoins are released each year, and this rate is reduced every four years by halving the reward for Bitcoin mining. The last of these "halvings" occurred in May 2020, and the next one is due in April 2024. When it happens, there may be a significant increase in Bitcoin demand, largely driven by media coverage and investor interest.

Secondly, Bitcoin is unregulated but it is not immune to the effects of government legislation. For instance, China's 2021 ban of the cryptocurrency caused a sharp price drop, though it quickly rallied in the following months.

Thirdly, public interest and media coverage. As with any speculative commodity, Bitcoin is greatly influenced by the court of public opinion. For example, in 2021, a tweet from Elon Musk caused Bitcoin's price to drop by 30% in a single day. This also wiped about $365 billion off the cryptocurrency market.

Finally, Bitcoin's value is also influenced by macroeconomic trends. For instance, the harsh economic conditions in 2022, including supply shortages, inflation, and the war in Ukraine, caused most investors to rein in discretionary spending and become less willing to speculate on risky or volatile assets.

Supply and demand

Bitcoin's price is influenced by supply and demand. There is a finite number of Bitcoins, with a maximum supply of 21 million. The last Bitcoin is projected to be mined in 2140. The supply of Bitcoin is reduced every four years by halving the reward for Bitcoin mining. This is known as a "halving" event and the most recent one occurred in April 2024.

The scarcity of Bitcoin adds to its demand. Demand for Bitcoin has been fuelled by increased media coverage and its popularity in countries with high inflation and devalued currencies. It is also in demand by those who use it for illicit activities.

When there is more demand for Bitcoin, the price goes up. When there is less demand, the price goes down. Demand for Bitcoin is also influenced by economic events, such as stock market fluctuations and global developments.

Public interest and media coverage

As the world's first cryptocurrency, Bitcoin has not only disrupted economic structures but has also captured substantial interest from media outlets worldwide. Media coverage plays a pivotal role in shaping public opinion and investor sentiment toward Bitcoin investment.

In its early years, Bitcoin faced scepticism and complaints from conventional financial institutions and media pundits who questioned its legitimacy and long-term viability. Media narratives frequently highlighted risks, including rate volatility, protection vulnerabilities, and associations with illicit activities on darknet markets. However, Bitcoin's attractiveness as a valid asset class and store of value gained momentum with endorsements from prominent investors, tech entrepreneurs, and economic establishments. Positive media coverage highlighted Bitcoin's ability to hedge against inflation, its use in cross-border transactions, and its role in advancing financial inclusion globally.

Media coverage of Bitcoin has, at times, contributed to market speculation and sensationalism, amplifying rate volatility and investor sentiment. News cycles focused on dramatic price swings, regulatory trends, and technological advancements have prompted short-term market trends and trading behaviour.

Key factors influencing public perceptions include framing and narrative construction, expert opinions and analysis, and regulatory developments and legal scrutiny. Media shops body Bitcoin-associated stories via narratives that emphasise both its ability as a disruptive innovation and its dangers and challenges. Commentaries from financial analysts, economists, and industry experts can sway public opinion on Bitcoin investment. Positive endorsements or warnings from influential figures can affect investor confidence and market volatility.

Media reporting on regulatory developments, legislative proposals, and legal disputes involving Bitcoin can shape perceptions of its legality, security, and long-term sustainability. Uncertainty or negative regulatory effects reported in the media may lead to market volatility and investor caution.

Research indicates that media attention in social networks, such as Twitter and Google Trends, partially influences Bitcoin prices, particularly during periods of higher uncertainty. Twitter is considered an instantly related momentum factor, while Google Trends acts as a more stable information demand source for investors.

Overall, media coverage of Bitcoin investment is anticipated to conform to regulatory trends, technological advancements, and evolving market dynamics. Increased participation of institutional investors and corporate entities in Bitcoin markets may further impact media narratives, emphasising Bitcoin's role within diverse investment portfolios and corporate treasury strategies.

Bitcoin's legality

The legality of Bitcoin varies from country to country. While some states have explicitly allowed its use and trade, others have restricted or banned it.

Countries Where Bitcoin is Legal

Bitcoin is legal in most developed countries, including the US, the UK, Japan, and Canada. In the US, the Internal Revenue Service (IRS) has classified Bitcoin as property for taxation purposes. In the UK, Bitcoin has been allowed since its inception. Canada maintains a generally bitcoin-friendly stance, defining Bitcoin as a crypto-asset that is taxed based on the circumstances in which it was used.

Countries Where Bitcoin is Illegal

Bitcoin is illegal in several countries, including China and Saudi Arabia. In China, the People's Bank of China prohibited financial institutions from handling bitcoin transactions in 2013 and effectively banned cryptocurrency exchanges in 2017. In Saudi Arabia, the Saudi Central Bank has warned against using Bitcoin, stating that it is high risk and that its dealers will not be guaranteed any protection or rights.

Countries with Mixed Bitcoin Legality

Some countries have a more complex relationship with Bitcoin. For example, in India, the government does not recognise cryptocurrencies as legal tender, but the Supreme Court of India lifted the RBI ban on cryptocurrency trade in 2020. In the European Union, Bitcoin is recognised as a crypto-asset, and while it is not illegal to use, there are regulatory controls in place.

Bitcoin's value

Scarcity: Bitcoin's supply is limited to 21 million, which will likely be reached by 2140. This restricted supply, combined with increasing demand, is the primary source of Bitcoin's value.

Divisibility: Bitcoin is highly divisible, allowing for up to eight decimal places, with constituent units called satoshis.

Acceptability: The adoption of Bitcoin is growing, with more people and businesses accepting and using cryptocurrencies, especially in countries with failing financial systems.

Portability: Bitcoin can be easily transferred and used across borders, enabling anyone with an internet connection to participate in the global economy and access financial services.

Durability: As a digital asset, Bitcoin can last as long as there is digital storage space available.

Uniformity: Bitcoins cannot be counterfeited and do not have a physical appearance, making them uniform and secure.

Other factors that influence Bitcoin's value include supply and demand, media coverage, public interest, and the actions of influential individuals and organisations. Bitcoin's value is also impacted by its status as a speculative asset, with investors hoping for short-term price fluctuations to generate returns.

It's important to note that investing in Bitcoin carries risks due to its volatility and the potential for significant price swings. Regulatory changes, environmental concerns, and the actions of governments and central banks can also affect Bitcoin's value.

Frequently asked questions