Bitcoin Investment: Still Worth It?

Bitcoin is a cryptocurrency with a lot of potentials. It is a decentralised digital currency that has grown exponentially over the last decade. It is a risky investment with high volatility, but it can be a good investment if you do it properly and as part of a diversified portfolio.

Bitcoin is based on blockchain technology, which makes it secure and impossible to tamper with. It is also the first cryptocurrency, giving it an edge over other cryptocurrencies.

The price of Bitcoin has been on an upward trajectory since its launch in 2009, with a few bumps along the way. In 2020, it was valued at $67,567. In March 2024, it hit a record high of $73,000.

Bitcoin has a lot of advantages. It is easy to buy and use, and its transactions are encrypted and irreversible, making it very safe. It is also flexible, allowing users to send and receive money anywhere.

However, investing in Bitcoin comes with risks. The cryptocurrency market is highly volatile and unpredictable. Bitcoin's value can fluctuate wildly in a short period, and there is no guarantee that it will always be the dominant cryptocurrency.

Before investing in Bitcoin, it is essential to do your research and understand the risks and opportunities. It is also crucial to choose a reliable platform and be aware of the fees and risks involved.

Overall, Bitcoin has the potential to be a good investment, but it is essential to approach it with caution and treat it as a long-term investment rather than a quick money-making scheme.

Bitcoin's volatility

Bitcoin is considered a volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The volatility of an asset is measured by how much its price fluctuates relative to the average price in a given period.

However, compared to other asset classes, Bitcoin has been three to four times as volatile as various equity indices from 2020 to 2024.

Bitcoin's high volatility means that it is a risky asset to hold. The more volatile an asset, the more people will want to limit their exposure to it. Volatility also increases the cost of hedging, which is a major contributor to the price of merchant services. If Bitcoin's volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

Managing Volatility Risk

There are a number of ways that investors can manage the risk associated with Bitcoin's volatility.

Firstly, investors can limit their exposure to Bitcoin and ensure that it represents a small proportion of a diversified portfolio.

Secondly, investors can use options strategies such as the 'risk reversal' strategy, which hedges against losses from unexpected price swings.

Finally, investors can use volatility indices and trackers to monitor Bitcoin's volatility and inform their trading decisions.

Bitcoin's value and demand

Scarcity and Finite Supply: Bitcoin's value is closely tied to its limited supply. Only 21 million bitcoins will ever exist due to its decentralised and deflationary nature. This scarcity, combined with increasing demand, drives up the price of Bitcoin. The protocol's halving mechanism, which reduces the reward for mining new blocks by half every four years, further contributes to its scarcity.

Divisibility: Bitcoin is highly divisible, allowing for transactions of small fractions of a bitcoin called satoshis. This divisibility makes it more accessible and flexible for smaller transactions.

Acceptability and Adoption: Bitcoin is gaining wider acceptance and adoption globally. More people are becoming familiar with cryptocurrencies, and businesses are increasingly accepting them as a form of payment. This increasing adoption drives demand and makes Bitcoin more valuable.

Portability: Bitcoin's digital nature allows for easy transfer and use across borders, enabling anyone with an internet connection to participate in the global economy and access financial services.

Durability: As Bitcoin is stored digitally, it can last indefinitely as long as there is digital space to store it. This durability ensures that it can be a long-term store of value.

Uniformity and Security: Bitcoins cannot be counterfeited, and their digital nature makes them less susceptible to physical theft compared to traditional currencies. This uniformity and security enhance their value.

Store of Value and Hedge Against Inflation: Investors view Bitcoin as a store of value and a hedge against inflation. The fixed supply of Bitcoin is seen as a favourable alternative to fiat currencies, which can be printed at the discretion of central bankers, leading to depreciation.

Media and News Coverage: Media and news coverage play a significant role in influencing investor sentiment and demand for Bitcoin. Positive news and coverage tend to drive up prices, while negative news can send prices downward.

Competition from Altcoins: The emergence of alternative cryptocurrencies, or altcoins, can impact the demand and price of Bitcoin. Ethereum, for example, has gained popularity due to its smart contract capabilities and decentralised finance applications.

Regulatory Landscape: The regulatory environment surrounding Bitcoin varies across countries and can significantly impact its demand and price. Positive regulatory developments, such as the approval of Bitcoin ETFs, can boost demand, while restrictive regulations or bans can negatively affect its value.

Investor Sentiment and Market Speculation: Bitcoin's price is highly sensitive to investor sentiment and market speculation. Fear of missing out (FOMO) and greed can drive up demand and prices, while panic and fear can lead to sell-offs and price declines.

While these factors contribute to Bitcoin's value and demand, it is important to remember that the cryptocurrency market is highly volatile. Investors should carefully consider their risk tolerance and conduct thorough research before investing in Bitcoin or any other cryptocurrency.

Bitcoin's regulation

Bitcoin regulation varies across the world, with some countries banning it and others adopting it as legal tender. In the US, Bitcoin is legal but not recognised as legal tender. It is regulated by the Financial Crimes Enforcement Network, the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and the US Treasury Department.

The SEC has stated that some cryptocurrencies "have the key attributes of a security", while Bitcoin is considered a "commodity". The CFTC treats Bitcoin as a commodity, while the Internal Revenue Service (IRS) treats it as property.

The US Congress is still debating how to regulate crypto, and it is unlikely that a full regulatory regime will be in place before 2025. However, court rulings and agency policies will continue to emerge and influence the industry.

The SEC and the IRS have proposed rules that could significantly impact the industry. The SEC aims to require investment advisors to keep customers' crypto assets with "qualified custodians", excluding current crypto exchanges. They also want to expand the definition of regulated exchanges to include crypto entities and decentralised finance (DeFi) projects.

The IRS taxes crypto profits as capital gains, the same as proceeds from selling stocks or bonds. Short-term capital gains are taxed at your normal income tax rate, while long-term capital gains are usually taxed at a lower rate.

Despite the risks, cryptocurrencies and the blockchain industry are gaining traction. Financial infrastructure is being built, and investors are gaining access to institutional-grade custody services. Crypto futures markets are being established, and many companies are gaining direct exposure to the crypto sector.

Overall, the regulatory landscape for Bitcoin is complex and evolving. It varies by country and even within the US, with different agencies treating Bitcoin differently. The lack of clear regulation is a concern for investors, and it remains to be seen how the US and other countries will choose to regulate this new asset class.

Bitcoin's transaction security

Bitcoin transactions are secured by blockchain technology, which uses cryptography, decentralisation and consensus to ensure trust in transactions.

Each new block in the blockchain contains a transaction or bundle of transactions. Each new block also connects to all the blocks before it in a cryptographic chain, making it nearly impossible to tamper with. All transactions within the blocks are validated and agreed upon by a consensus mechanism, ensuring that each transaction is true and correct.

The decentralised nature of blockchain means there is no single point of failure and a single user cannot change the record of transactions. This makes it very difficult for hackers to gain access to the system.

However, blockchain networks are not immune to cyberattacks and fraud. Hackers and fraudsters threaten blockchains in four primary ways: phishing, routing, Sybil and 51% attacks.

To protect against these threats, Bitcoin uses proof-of-work (PoW) to make changes to the ledger difficult, which eliminates trust and introduces an external cost for any would-be attacker. The block reward also financially incentivises miners to behave properly. As the price of Bitcoin increases, the value of the block reward increases, incentivising miners to bring more hashrate online to mine. The higher the hash rate of a cryptocurrency network, the more expensive it is to launch a 51% attack.

Users can also take steps to protect their Bitcoin transactions. For example, Bitcoin wallets can be backed up and stored in multiple copies, even printed on paper for a hard-copy backup. Users can also use "cold storage", where the keys are generated on an offline system and stored offline.

Bitcoin's long-term investment potential

Bitcoins long-term investment potential

Bitcoin has grown exponentially over the last decade, and it could represent a new form of decentralised money and cross-border digital currency. The ability to have a trustless payment system without a third-party intermediary has many investors expecting further growth.

The pros

• Bitcoin has consistently risen in price over the long term.
• It is a scarce digital asset, making it rare and valuable.
• It is the first-ever cryptocurrency.
• It is easy to buy and use, and there are many ways to use it.
• It is very safe to do bitcoin transactions because they are encrypted and irreversible.
• It can be a very profitable investment over the long term.
• It is suitable for many things, and more and more businesses are accepting it.
• It can be used to hedge against fiat currency depreciation.
• It is not inflationary, unlike fiat currencies.
• It has a large user ecosystem that supports its long-term growth.
• It is one of the fastest-growing cryptocurrencies in the world.

The cons

• Bitcoin is highly volatile, so price swings can sometimes be violent.
• The regulatory outlook for Bitcoin is still unclear.
• Bitcoin's total value may take years to realise.
• The crypto market is largely unregulated, meaning that investors may not have the same legal protections as they would in traditional financial markets.
• There have been instances of exchanges and digital wallets being hacked, resulting in significant losses for investors.
• It is difficult to predict the future of Bitcoin due to its volatility.

Expert opinions

Experts are divided on whether Bitcoin is a good long-term investment. Some believe that it could reach a price of $250,000 or even $1 million by 2030. Others, like billionaire investor Warren Buffett, feel that it is an unproductive asset with no unique value.

Frequently asked questions