Is Buying A Whole Bitcoin A Smart Investment Move?

Bitcoin is a highly controversial investment option. On the one hand, it has been one of the best investments in the world since its creation in 2009, with its value skyrocketing to as high as $68,789 in November 2021. On the other hand, it is also a risky investment with high volatility.

Bitcoin's value comes from its finite supply, decentralised nature, and ability to serve as a non-correlated asset. However, its value is tied exclusively to investor sentiment, which can be unpredictable and inconsistent.

Before investing in Bitcoin, it is important to consider the risks, such as the threat of hacking, the impact of regulatory changes, and the lack of consumer protections offered by crypto exchanges. It is also crucial to practice safe storage methods, such as using a hardware wallet, to protect your investment.

Overall, whether or not it is worth investing in a whole Bitcoin depends on your risk tolerance, financial position, and perspective on the future of cryptocurrency.

Bitcoin's volatility

Bitcoin is a volatile asset, and its price can fluctuate significantly over time. Volatility is a measure of how much the price of a financial asset varies, and a volatile asset is considered riskier to hold as its value can change substantially in either direction.

While Bitcoin's volatility can be a risk for investors, it can also present opportunities. Bitcoin has historically exhibited high volatility or high measures of standard deviation, but its returns have been disproportionately skewed towards the positive side. This means that investors have been more than compensated for taking on the risk.

Additionally, Bitcoin's volatility can provide clues about future price movements. Historically, low volatility has typically occurred at the end of long bear markets, and it has been a precursor to a price increase. For example, in early 2024, Bitcoin's volatility reached a new all-time low, and this was followed by a steep rise in price.

In summary, while Bitcoin is a volatile asset, its volatility has been declining, and investors have been rewarded for taking on the risk. Bitcoin's volatility can also provide insights into potential future price movements, making it an important factor to consider when investing in Bitcoin.

Liquidity

Bitcoin has a relatively loose correlation with other asset classes, making it a potentially attractive tool for portfolio diversification. It has a fixed supply, meaning investors will not be negatively impacted by dilution. Its fixed supply may also eventually make it an attractive hedge against inflation and a store of value, although its extreme volatility has limited its appeal in those departments up to this point.

Bitcoin's price is influenced by liquidity injections into the US economy. Treasury Secretary Janet Yellen may add more liquidity to the US economy, which would be good for Bitcoin. The US Treasury is about to inject up to $1 trillion into markets before the end of 2024, which will likely push Bitcoin past its all-time high. This is because Bitcoin tends to perform extremely well during periods of rapidly increasing liquidity.

Inflation risk

Bitcoin is a risky investment, and investors should be aware of the potential risks before deciding to invest. One of the main risks is inflation.

Bitcoin's value is influenced by various factors, including investor sentiment and market conditions. During periods of high inflation, such as in 2022, the price of Bitcoin has shown a positive correlation with stock prices. This correlation undermines the argument made by proponents of the digital currency that Bitcoin is an effective hedge against inflation. In fact, in 2022, Bitcoin prices tumbled about 60% year-to-date as of September 21, as the high inflation prompted the U.S. Federal Reserve to aggressively raise interest rates, negatively impacting risk asset prices.

Bitcoin's performance during inflationary periods is a concern for investors because it contradicts the narrative that Bitcoin is a good inflation hedge. The argument for Bitcoin as an inflation hedge is based on its limited supply, which is in contrast to traditional currencies, where governments or central banks can devalue the currency by increasing its supply. However, Bitcoin's performance during inflationary periods, such as in 2022, has not supported this theory.

Additionally, Bitcoin's history is relatively short, making it challenging to determine its effectiveness as an inflation hedge over the long term. Its extreme volatility and lack of a long-term track record make it a risky investment, especially during periods of economic uncertainty.

While some investors view Bitcoin as an alternative to traditional assets like gold, which has historically been used as a hedge against inflation, others remain sceptical. Veteran investment strategist David Roche, for example, recommends allocating only a small portion of a portfolio (2-3%) to crypto, while investing a larger percentage in gold (7%).

In conclusion, while Bitcoin has the potential to be a hedge against inflation due to its limited supply, its performance during inflationary periods has been disappointing. Investors considering investing in Bitcoin should carefully assess their risk tolerance and be aware of the potential for significant losses during economic downturns or periods of high inflation.

Security threats

Bitcoin is a risky investment with high volatility, and it is important to be aware of the security threats associated with it. Here are some of the key security threats to consider:

• Physical attacks: These include theft, burglary, and extortion. Investors have been held captive and extorted, while others have had their phones or hardware wallets stolen. To prevent this, it is recommended to avoid disclosing your physical location or specifics about your bitcoin, strengthening your home defence, and not keeping a majority of your keyset on your person or at your primary residence.
• Accidental loss: This can occur due to fire, floods, or misplacing your bitcoin. To prevent this, it is recommended to not store your keys in one place and to pay extra attention to your bitcoin during major life changes.
• Hacking: As bitcoin is technology-based, it is vulnerable to cyberattacks. Hackers can use various tactics such as spoofing, ransomware, and targeting personal accounts to compromise your key. To prevent hacking, it is recommended to keep your keys in cold storage (offline), use strong passwords, perform regular software updates, and verify the authenticity of software downloads.
• Phishing attacks: These are deceptive tactics used by thieves to contact investors and trick them into clicking links, sending money, or sharing information. To prevent this, it is recommended to not respond to unknown parties, verify authentic requests through another form of communication, and not send bitcoin to people you don't know.
• Insider attacks: Bitcoin theft is often a crime of opportunity, and the perpetrator could be someone close to the investor, such as a friend, relative, or associate. To prevent this, it is recommended to avoid sharing specifics about your bitcoin, even with trusted individuals, and to keep hardware wallets and seed phrases secure.
• Device failure: Hardware wallets can be defective, and liquids can damage electronic devices. To prevent this, it is recommended to keep beverages away from devices, perform health checks, stay updated with firmware updates, and use provided cables from device manufacturers.
• Custodial risk: Leaving your bitcoin in the care of someone else, such as on an exchange, lending it out, or trusting it with a custodian, can result in loss due to hacking, bankruptcy, or bad investments. To prevent this, it is recommended to withdraw bitcoin to a set of keys you control, distribute your keys across multiple locations, and carefully read the fine print before lending out bitcoin.
• Inheritance planning: Without a clear inheritance plan, loved ones may struggle to find and recover bitcoin after an investor's death. To prevent this, it is recommended to formulate an inheritance plan, involve heirs, trustees, and attorneys as needed, and include bitcoin within overall estate planning.
• Market volatility: The price of bitcoin is highly volatile and unpredictable, making it difficult to predict returns on investment. To mitigate this risk, it is recommended to make small investments and closely monitor the market.
• Fraud and scams: The lack of regulation in the bitcoin market creates opportunities for fraudulent exchanges and scams. To prevent this, it is important to carefully research cryptocurrency wallets and exchanges before making any transactions.
• Regulatory uncertainty: The lack of clear regulations around bitcoin and cryptocurrency can pose a risk to investors, as governments may suddenly change their stance on it. For example, in 2021, China effectively made it illegal for its citizens to mine or hold cryptocurrency.

Regulatory changes

Regulation is one of the key factors that affect Bitcoin's price. The cryptocurrency's rise in popularity has been halted each time a government has introduced restrictive policies, and countries have taken varying approaches to Bitcoin regulation. For example, in November 2019, China accelerated a crackdown on cryptocurrency businesses, causing Bitcoin to sink. On the other hand, regulatory "victories", such as the approval of Bitcoin Spot ETFs in January 2024, have caused prices to surge temporarily.

The varying treatment of Bitcoin by different governments presents a challenge for policymakers. Cryptocurrencies are not beholden to country borders or specific agencies within a government, but their regulation will require a well-coordinated effort across several economies. The impact of regulatory changes on Bitcoin's price can be seen in the differing reactions of China and Japan. China's ban on initial coin offerings (ICOs) in 2019, designed to prevent capital outflow and money laundering, resulted in a price decline of up to $500 for Bitcoin. In contrast, Japan's recognition of cryptocurrencies as legal tender caused Bitcoin's price to spike by 2.8%.

The US government's regulatory stance on Bitcoin is complex. The Commodity Futures Trading Commission (CFTC) treats Bitcoin as a commodity, while the Internal Revenue Service (IRS) treats it as property. The Securities and Exchange Commission (SEC) does not yet regulate Bitcoin, but it does regulate investments or derivatives related to Bitcoin.

While Bitcoin has survived many regulatory changes, this may be due to the pressure the cryptocurrency community puts on governments and regulators, and their efforts to avoid regulation. If this continues, Bitcoin will likely survive as long as it retains the support of its users, who communicate with their legislative representatives.

Some commentators have called for better regulation of Bitcoin and other cryptocurrencies. The head of the CFTC recently stated that, with the necessary framework and authorisation, the organisation could construct effective regulatory guidelines within a 12-month period. However, the SEC has been criticised for stymying compliance, making regulatory compliance a "virtually impossible task".

In summary, regulatory changes can have a significant impact on Bitcoin's price. While Bitcoin has survived regulatory changes thus far, continued pressure from the cryptocurrency community and users will be necessary for it to continue to do so.

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