Bitcoin Investment: Smart Move Or Risky Gamble?

Bitcoin is a fascinating asset. It is simultaneously a transactional tool and a speculative commodity, attracting the attention of investors since it first hit the market. However, it is also incredibly volatile.

Bitcoin's value is influenced by supply and demand, the strength of other currencies, public interest and media coverage, and the regulatory environment. Its price can go up, but it can also go down a lot.

Bitcoin is a risky investment with high volatility and should be considered only if you have a high-risk tolerance, are in a strong financial position, 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.

Bitcoin's volatility

Bitcoin is considered a volatile asset. Its volatility is measured by how much its price fluctuates relative to the average price over a period of time. Volatility is a measure of how much the price of a financial asset varies over time. The more volatile an asset, the more desirable it is to limit exposure to it.

Volatility means that an asset is risky to hold. On any given day, its value may go up or down substantially. Volatility also increases the cost of hedging, a major contributor to the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

On August 5, 2024, Bitcoin's volatility index reached its highest level in 20 months, briefly dipping below $50,000. This was followed by a recovery, with Bitcoin trading at $56,676. Despite this rebound, Bitcoin has faced fierce resistance at the $56,000 level, and its capabilities as a hedge against inflation have been questioned.

The unpredictable nature of Bitcoin's volatility underscores the risks associated with investing in this cryptocurrency. While it has the potential for high returns, investors should be aware of the possibility of significant losses.

The practicality of Bitcoin for payments

Bitcoin is a decentralised, peer-to-peer payment network and digital currency. It is an open-source project, meaning that its design is public, and no one owns or controls it. Bitcoin transactions are secured by mathematics and energy. Cryptographic signatures and proof of work prevent fraud and protect your money.

There are several benefits to using Bitcoin for payments. Firstly, it is a very low-cost method of payment. It is also highly convenient, especially for mobile payments. When using Bitcoin on a mobile device, you can pay with a simple two-step scan-and-pay. There is no need to sign up, swipe a card, type a PIN, or sign anything. All you need to receive Bitcoin payments is to display the QR code in your Bitcoin wallet app and let the other party scan your mobile, or touch the two phones together (using NFC radio technology).

Another advantage of Bitcoin is that it works everywhere, anytime. Similar to sending an email, you don't need to ask recipients to use the same software, wallets or service providers. You just need their Bitcoin address. The Bitcoin network is always running, even on weekends and holidays. Additionally, Bitcoin allows for fast international payments. There are no banks to make you wait three business days, no extra fees for making an international transfer, and no limitations on the minimum or maximum amount you can send.

Bitcoin also allows you to protect your identity. There is no credit card number that malicious actors can collect to steal from you. In some cases, it is even possible to send a payment without revealing your identity, much like with physical money. However, it is important to note that some effort is required to protect your privacy.

Finally, Bitcoin gives you control over your money and protects you from certain types of fraud. As long as you take the required steps to protect your wallet, Bitcoin can give you a strong level of protection. For example, transactions are irreversible, so you don't have to worry about people undoing, rearranging, or losing your transactions.

Despite these benefits, there are also some challenges and risks associated with using Bitcoin for payments. One concern is the high volatility of Bitcoin prices, which could result in significant losses if you sell at the wrong time. Additionally, there is a lack of consumer protection and regulatory clarity in the cryptocurrency market. Transactions are irreversible, and there may be limited recourse if you lose your crypto in a hack or encounter fraud.

In conclusion, while Bitcoin offers a fast, convenient, and low-cost way to make payments, it is important to carefully consider the risks involved and take the necessary steps to protect your investment.

Environmental concerns

Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy—more than is used by some small countries—to perform the work associated with crypto mining. Bitcoin mining is the automated process of validating Bitcoin transactions without the intervention of trusted third parties like banks. The way the transaction validation process is designed uses large amounts of energy—the network depends on the computational power of thousands of computers. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.

The largest country for Bitcoin mining is the United States, which accounts for 37.84% of Bitcoin mining activities. Other countries with large Bitcoin mining operations include China (21%), Kazakhstan (12%), and Inner Mongolia (8%). According to the Center for Strategic and International Studies, about 76% of the energy consumed in China is generated from coal and crude oil. The U.S. gets most of its electricity by burning fossil fuels, per 2019 data from the EIA. Kazakhstan mainly uses fossil fuels.

As a result, three countries heavily dependent on fossil fuels are responsible for around 72% of the world's Bitcoin mining. The Cambridge Bitcoin Electricity Consumption Index estimates that Bitcoin uses an estimated 140 Terawatt-hours (TWh) of electricity annually (0.63% of global electricity use) and about 352 TWh of energy (0.22% of global energy production) at the point of production—more than Pakistan and Ukraine. Another estimate by Digiconomist, a cryptocurrency analytics site, placed the figure at 138 Terawatt-hours based on energy consumption through Dec. 11, 2023. This computed to around 773.61 kilowatt-hours of electricity per transaction, the same amount of power consumed by the average American household over 26 days.

The amount of energy consumed by cryptocurrency mining will likely vary over time, assuming that prices and user adoption continue to change. Cryptocurrency mining is a competitive process: as the value of the block reward increases, the incentives to start mining also increase. Higher cryptocurrency prices mean more energy is consumed by crypto networks because more people join the mining networks, trying to profit from the increases.

Bitcoin mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. According to Digiconomist, the Bitcoin network generates approximately 72,500 tons of electronic waste annually. The continuously increasing energy efficiency of newer iterations of mining devices means older machines will inevitably become obsolete on a regular basis and will be pressured out of the market.

The environmental impact of Bitcoin mining has improved in recent years. In 2021, China expelled its miners, causing more than 50% of the hashrate—the collective computing power of miners worldwide—to drop off the network. The United States has become the new hotspot for global crypto miners, with nearly 17% of all global Bitcoin miners as of 2021. The exodus from China also meant that a lot of older, more energy-inefficient mining equipment was likely retired. Experts predict that the migration of miners to the cheapest sources of energy, which are more often than not renewable, will improve Bitcoin's carbon footprint in the long term.

Bitcoin and criminal activity

Bitcoin and other cryptocurrencies have become increasingly popular over the years, and the introduction of spot bitcoin exchange-traded funds (ETFs) in early 2024 has further fuelled this popularity. However, the volatile nature of cryptocurrencies, regulatory ambiguity, and their use in criminal activities are some of the key concerns surrounding them.

Cryptocurrency, due to its pseudo-anonymous nature, has become an attractive medium for conducting illicit activities. Criminals can use cryptocurrencies instead of the formal banking system to move large sums of money, potentially reducing the risk of detection by law enforcement or traditional financial institutions. This makes cryptocurrency a useful tool for organised crime groups (OCGs) to launder money and conduct other crimes related to corruption, such as bribery and embezzlement.

The inherent pseudonymity and decentralised nature of cryptocurrencies also make it challenging to identify and take legal action against perpetrators. The lack of regulatory measures and the international nature of cryptocurrency transactions across multiple jurisdictions can make it difficult for law enforcement to track and recover stolen funds.

In 2023, illicit cryptocurrency addresses received a total of $24.2 billion, with stablecoins now being the cryptocurrency of choice among cybercriminals due to their stability. However, Bitcoin is still the preferred cryptocurrency for activities such as darknet market sales and ransomware extortion.

The development sector and international development agencies can play a crucial role in mitigating the criminal use of cryptocurrencies by coordinating the implementation of regulatory frameworks, educating the public about the risks, and strengthening law enforcement agencies' capacity to dismantle criminal networks.

While the use of cryptocurrency in criminal activities is increasing, it is important to note that cryptocurrency transactions related to criminal activities represent only a limited share of the criminal economy compared to cash transactions.

Bitcoin's value

Bitcoin's supply is limited to 21 million, and only a certain number are released each year. This controlled supply can drive up demand and media interest, which in turn can increase its value. However, its value can also be negatively impacted by government legislation, such as China's 2021 ban on the cryptocurrency.

Media coverage and public interest can also influence Bitcoin's value. Positive media coverage can increase demand, while negative coverage can reduce it. For example, in 2021, Tesla CEO Elon Musk's positive tweets about Bitcoin contributed to a rise in its value, but a single negative tweet from him caused its price to drop by 30% in a single day.

The regulatory environment can also impact Bitcoin's value. In 2024, the long-crypto-resistant Securities and Exchange Commission (SEC) approved spot Bitcoin exchange-traded funds (ETFs) for the first time. This was seen as a milestone in the history of the digital currency and an indicator that cryptocurrencies could be moving closer to the investor mainstream. However, the SEC has long been skeptical of cryptocurrencies, and its approval came with a warning about the risks associated with investing in Bitcoin.

The performance of other cryptocurrencies can also affect Bitcoin's value. Ethereum, the second-largest cryptocurrency by market capitalization, is seen as a significant competitor to Bitcoin. If Ethereum or another cryptocurrency overtakes Bitcoin as the largest cryptocurrency by market cap, it could negatively impact Bitcoin's value.

Finally, Bitcoin's utility as a means of payment can influence its value. Critics argue that Bitcoin is too inefficient and volatile to work as a means of payment, while advocates claim that it is already more efficient than credit cards and that innovations will only make it more efficient in the future.

In summary, Bitcoin's value is highly volatile and can be influenced by various factors, including supply and demand, media coverage and public interest, the regulatory environment, the performance of other cryptocurrencies, and its utility as a means of payment.

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